Macroprudential Monetary Policy – A Ghastly Neologism

Just Another Word For Micro-Management Or Meddling

In a recent Wall Street Journal Opinion page piece titled “John H. Cochrane: The Danger of an All-Powerful Federal Reserve/'Macroprudential' policy thinkers want central banks to micromanage the entire financial system.” (subscribers only) by John H. Cochrane published on 8/27/2013.

In this article we are referred to a recent IMF paper by the title “Macroprudential Policy: An Organizing Framework” published in March 2011.

To quote from the IMF paper Macroprudential Policy is (emphasis added):

“Macroprudential policy seeks to limit systemic, or system-wide, financial risk. Defining elements of macroprudential policy are its objective, its scope of analysis (the financial system as a whole and its interactions with the real economy), its set of powers and instruments, and their governance (prudential tools and those specifically assigned to macroprudential authorities). Macroprudential policy is a complement to microprudential policy and it interacts with other types of public policy that have an impact on systemic financial stability.”

Financial stability is an oxymoron. Economies and their financial systems are dynamic systems.

A Bit Of History

From Wikipedia we learn “As documented by Clement (2010), the term "macroprudential" was first used in the late 1970s in unpublished documents of the Cooke Committee (the precursor of the Basel Committee on Banking Supervision) and the Bank of England.”

Since we know that the so called Basel Accords are a major contributing factor for the Financial Crisis of 2008 and subsequent Great Recession, because e.g. mortgage and sovereign debt were declared safe, we should remain very skeptical. I previously blogged about this subject here.

 To Believe That Bureaucrats Or Economists

Can Handle The Next Financial Crisis Is Foolish

The author of the above mentioned WSJ article correctly pointed out that “central banks don’t have a great track record of diagnosing what they later considered “bubbles” and “systematic risks”. The Fed didn’t act on the tech bubble of the 19990s or the real estate bubble of the last decade. European bank regulators didn’t notice that sovereign debts might pose a problem.”

Had the Fed simply enforced a minimum 10% down payment rule for the purchase of any residential home (like in Canada), then very likely there would not have been such a real estate bubble.

Had the Fed not pursued such a reckless low interest rate policy for too long, there would not have been a real estate meltdown. And the Fed is a repeat offender under Bernanke!

I have previously written a number of critical blogs about the Fed here, here.