The
Senate Finance Committee sees no problem with appointing Ben Bernanke as the
next chair of the Federal Reserve. Apparently, neither do the markets. Well I
do. Bernanke is way too smart to be chair of the Fed. Take
a look at
his CV. Wouldn't the nation be better off if Bernanke continued to devote
this considerable brain power to economic research? The job
of the Board members of the Federal Reserve -- at least that part of the job that
markets care about -- is rather easy. Once a month or so, on a Monday evening,
have a quick scan of the latest available information, provided by staff
members. The key information is summarized in a report called the Blue Book,
which explains the estimated effects on the economy of different policy
scenarios (e.g. if you raise interest rates a point, unemployment will go up by
.5 percent and inflation will drop by 1 percent). Choose which scenario
you like most, and the next morning there will be a meeting in which you can
vote for it. By 10:15 at the latest, the meeting is done. Set a date to do it
again the following month.
If this
sounds like a lot of work, there is fortunately a short cut. Twenty-five years
ago, Stanford economist John Taylor wrote down a recipe since known as Taylor's
rule. The rule serves both as a prescription for what a central bank
should do (more or less), and a description of what many central banks
have been doing (more or less). The core of the rule goes as follows:
1. For
each percentage point than unemployment exceeds what you would like it to be, lower
the interest rate by x percent (and if unemployment is lower than you'd
like it to be, raise the interest rate by x percent).
2. For
each percentage point that inflation exceeds what you would like it to be, raise the
interest rate by y percent (and if it is lower than you'd like it to
be, lower the interest rate by y percent.
Using
this formula, of course, you don't even need to read the Blue Book. I
propose the Senate Finance Committee puts out a call for applications
for the job. The application should (i) state what the applicant
believes the target unemployment and inflation rates should be, and
what x and y should be; (ii) explain what
the applicant will do with the rest of his or her free time to guarantee there will be no unwarranted meddling in the markets. Here is
my application:
Target
unemployment: 5%.
Target
inflation:
2%
Value
of x:
1%
Value
of y:
1.5%
What I
will do to keep my meddling paws out of where it doesn't belong: Fishing in
the Florida Keys.
If
this meets with the Senate's approval, I can be reached by phone or
email. Please be sure to mail the first month's paycheck -- my truck is
playing up again. But in any case, help our country: give Ben Bernanke
a difficult job.
9:03:51 AM
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