Matt Yglesias ponders Star Wars and militaristic monetary policy.
The problem here is that the ECB loses that power if it commits itself to implementing optimal policy. A central bank should be stabilizing the growth path of aggregate demand. But a central bank that’s actually doing that has no leverage over anyone else. It’s got an important job to do and it’s doing the job well. Here in the United States, the Pentagon’s Strategic Command has the power to launch nuclear missiles and destroy the world. In theory, that could give it enormous leverage over tax policy. In practice, the officers who run Strategic Command due their duty rather than threatening to unleash mass death on the planet unless they get their way on unrelated issues.
Yglesias suggests institutions, including central banks, could be more activist, but won’t, and ultimately shouldn’t. He shies away and decides it would just be nice if the ECB did it’s actual job well, much less try to use its influence outside its mandate.
This reminds me of a time I had the pleasure of seeing the uncensored Karl Smith in person.
He was discussing what our public institutions could do if the ECB (read: the Germans) sat back and actually let Europe go to hell. He suggested that if it really got dire the Fed could and probably should launch an unceasing assault against the Euro.
Now, if it comes down to world economic collapse because some central banks do horrible monetary policy, and the US central bank launching speculative attacks against currencies to coerce proper policy responses, I side with the Fed. So give Bernanke the guns.
This is just to say I think Yglesias is too restrained — or hasn’t thought widely enough on the possible worlds we could be living in.