Lars wrote a great post commenting on an op-ed written by John Cochran about “macroprudential policies” yesterday (recommended reading). I agree with Lars that gyrations toward macroprudential policies, or policies that are meant to contain bubbles, what I call the investment Gestapo, are likely more harmful than beneficial for the same reasons no one in or on the periphery of the central banking circle, except for perhaps Woodford, is willing to go against the flow and call monetary mistakes out for what they are. The central banks already have too much power that is regularly abused for egotistical pleasures, they need not be given more.
The point of this post, however, is that while I agree that macroprudential policies are unwarranted, addressing them in a vacuum is nearly as beside the point as addressing Gengis Khan’s problem with polygamy instead of war crimes. Not that it isn’t a great way to start nibbling around the edges, attempting to keep the problem from getting worse; but if combined with the real cause of the financial crisis, it would make a much more powerful argument against such designs toward power grabs. If there hadn’t been asymmetrical inflation targeting, there would have been no financial crisis. If there had not been a global financial meltdown, most people would be offended by the suggestion of adopting macroprudential policies.
I don’t want to take away from the good things Cochran has to say; but I have to admit that I don’t like him very much due to his participation in the problem, complete with unconvincing, inflation-obsessed frontal assaults on Scott Sumner’s arguments from time to time. It would be nice to know if he has changed his mind because it seems that he’s put himself a bit of a difficult position supporting policies that create an environment ripe for financial crises, but critical of proposed regulations designed to cope with them. He can’t have it both ways.