Mt. Vernon Register-News

Opinion

November 15, 2013

Handcuffs for Fed tighten with fiscal profligacy

(Continued)

“What would the Fed do under the circumstances?” Hamilton said. “They’d pretty much have to step in, assure dealers they would buy the debt.”

What might seem like a short-term solution could turn into something protracted if investors bail. “It’s not a way to solve things, but we could find ourselves in that situation,” he said.

Central bankers, weaned on the idea of low inflation as the Holy Grail, aren’t really going to play that game, are they? The answer I got surprised me.

There are two schools of thought on the issue, explained Marvin Goodfriend, a professor of economics at Carnegie Mellon University in Pittsburgh and former research director at the Richmond Fed. The first holds that “central bank independence is illusive” and only as good as the public’s belief in the central bank’s commitment to stable prices.

The other view? “The central bank is available when needed if a country becomes paralyzed,” Goodfriend said.

OK, but real central bankers don’t ascribe to that view, do they?

“Having studied the issue for a lifetime, I can tell you the second view is taken seriously,” Goodfriend said.

I’m already sorry I asked.

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