Central Banks and Politics

Most of what you've read lately about the "crisis of economics" is rubbish. The Great Recession poses no challenge to the core ideas of modern macroeconomics. The notion that mainstream economics claimed that bubbles cannot happen, or deplored any and all financial regulation, or advocated laissez faire, or upheld any of the other shibboleths that the past two years have supposedly refuted, is ridiculous. Please note that critics of the policies that helped cause the recession almost invariably do so from within the prevailing paradigm--using lines of argument that were already well developed.

The nearest thing to an exception to this is central-bank independence. Here is an idea that was very widely accepted--not as a foundational principle of mainstream macroeconomics, obviously, but nonetheless as a clear-cut commandment. This principle has been cast aside--and rightly so--during the response to the emergency, first in the US and now in Europe. But the idea is so tenacious that nobody seems willing to admit it. Here, as my new column for the FT argues, is a big idea of orthodox economics that really does need to be re-examined.