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By law, Fed has two (the third is on the paper but is ignored) goals: price stability and close to the full employment. ECB has only price stability written into its charter, and this won't be changed unless a new treaty is made.

There was a vicious fight at the Jackson Hole symposium this year, between Willem Buiter and Alan Blinder. See the round-up of the symposium here, links to Buiter/Blinder fight are in the very last paragraph.

The WSJ blog said, in particular:

Mr. Buiter slams the Federal Reserve, European Central Bank and Bank of England for what he says was a mishandling of the financial crisis and monetary policy over the past year. He gives the worst marks to the Fed, saying it's too close to Wall Street and financial markets -- responding to their needs to the detriment of the wider economy. Mr. Buiter, a former member of the BOE's Monetary Policy Committee, said the Fed overreacted to the economic slowdown -- misjudging the importance of financial stability to the overall economy -- and created a deeper inflation problem as a result.

An essence of Blinder's remarks, from the same WSJ source:

One day a little Dutch boy was walking home when he noticed a small leak in a dike that protected the people in the surrounding town. He started to stick his finger in the hole, but then he remembered his moral hazard lesson. "The companies that built this dike did a terrible job," the boy said. "They don't deserve a bailout. And doing that would just encourage more shoddy construction. Besides, the dumb people who live here should never have built their homes on a floodplain." The boy continued on his way home. Before he arrived, the dike burst and everyone for miles around drowned, including the little Dutch boy.

Mr. Blinder continued: "You might have heard an alternative version of this story circulating around the Fed."

In this kindler, gentler version, the little Dutch boy, somewhat desperate and very worried about the horrors of the flood, stuck his finger in the dike and held it there until help arrived. ... It was painful. The little Dutch boy would much rather have been somewhere else. But he did it anyway. And all the foolish people who live behind the dike were saved from the error of their ways.

As you see, Buiter is aghast at the very thing those two French papers seem to agree on: too much flexibility by the Fed. However, Buiter isn't really worried about Fed's flexibility regarding the economy, he's more concerned about Fed caring too much about the Wall Street's perception of the economy.

by Sargon on Wed Sep 3rd, 2008 at 12:07:19 PM EST

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