No. At most, it is the central bank picking losers. For almost every ordinary loan agreement (real estate, revolving inventory credit, credit to consumer durables, etc.) you can make hard-and-fast rules. My suggestions would be:

• Rediscount no more than 72 % of the value of the collateral, and no more than 90 % of the value of the loan

• Don't rediscount loans collateralised with financial assets

• Rediscount everything at 0 % interest unless discretionary powers are invoked. Recall that the margin will still have to be funded in the money markets, and under this system the money markets will not be fixed at the policy rate. So the final effective rate can still be substantial.

• Intervene in the ForEx markets to prevent the currency from appreciating by more than N % pr. month, in terms of the real exchange rate against a trade-weighted basket of currencies, where N is a publicly announced number somewhere between 1/3 and 1. Additionally, offer private firms and foreign central banks currency swaps out of foreign currency at currently prevailing exchange rates.

• Irrespective of the above, procure sufficient hard currency reserves and/or currency swaps with appropriate central banks to cover the gross total domestic hard currency liabilities.

• Do not defend the lower bound of the exchange rate, but do act as market maker for currency swaps into foreign currency between private firms and other central banks (this can be done cheaply, since a currency swap with a central bank carries no default risk). Do not charge for this service (the other central bank can, however).

This should be sufficient to prevent most bubbles, so discretionary margin or interest rate hikes for certain activities should be rare and individually justified to the parliamentary central bank oversight committee.

I believe that there are compelling due process arguments for limiting the discretionary powers of unelected central bankers. So I'm completely on board with the monetarist insistence on predictable, rules-driven central banking. I just radically disagree about the nature of the appropriate rules.

- Jake

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