John H. Cochrane of the University of Chicago has an excellent op/ed in today’s Wall Street Journal, “The Federal Reserve: From Central Bank to Central Planner.” [If you are blocked from the Journal, you can go to John’s site and find it there.] In it, he makes the case that the Federal Reserve under Ben Bernanke has become a central planner. I’m not sure if John knows this–I’m guessing he doesn’t–but he’s plowing ground that Jeff Hummel plowed over a year ago in his 2011 article, “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner.”

Herewith some excerpts from Cochrane followed by some excerpts from Jeff Hummel.


A revealing example of where we are going emerged last spring, admirably documented on the Fed’s website. Using its bank-regulation authority, the Fed declared that the banks that had robo-signed foreclosure documents were guilty of “unsafe and unsound processes and practices”–though robo-signing has nothing to do with the banks taking too much risk.

The Fed then commanded that the banks provide $25 billion in “mortgage relief,” a simple transfer from bank shareholders to mortgage borrowers–though none of these borrowers was a victim of robo-signing.

The Fed even commanded that the banks give money to “nonprofit housing counseling organizations, approved by the U.S. Department of Housing and Urban Development.” Why? Many at the Fed see mortgage write-downs as an effective tool to stimulate the economy. The Fed simply used its regulatory power to help meet that policy goal.


Both Ben S. Bernanke and Milton Friedman are economists who studied the Great Depression closely. Indeed, Bernanke admits that his intense interest in that event was inspired by reading Milton Friedman and Anna Jacobson Schwartz’s Monetary History of the United States, 1867-1960 (1963). Bernanke agrees with Friedman that what made the Great Depression truly great rather than just a garden-variety depression was the series of banking panics that began nearly a year after the stock-market crash of October 1929. And both agree that the Federal Reserve (the Fed) was the primary culprit by failing to offset, if not by initiating, that economic cataclysm within the United States (Ip 2005). As Bernanke, while still only a member of the Fed’s board of governors, said in an address at a ninetieth-birthday celebration for Friedman: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again” (2002b).

This seeming similarity, however, disguises significant differences in Friedman’s and Bernanke’s approaches to financial crises, differences that have played an enormous yet rarely noticed role in the recent financial crisis. Not only have those differences resulted in another Fed failure–not quite as serious as the one during the Great Depression, to be sure, yet serious enough–but they have also resulted in a dramatic transformation of the Fed’s role in the economy. Bernanke has so expanded the Fed’s discretionary actions beyond merely controlling the money stock that it has become a gigantic, financial central planner. In short, despite Bernanke’s promise, the Fed did do it again. [emphasis his]

If you want more detail on Bernanke’s move to central planning, you’ll find it in the Hummel article.

One jarring sentence in John Cochrane’s piece is this:

The idea that central banks are centrally responsible for inflation and macroeconomic stability only dates from Milton Friedman’s work in the 1960s.

Note that Cochrane gives zero credit to Milton’s tireless co-author, Anna J. Schwartz.

Elsewhere in his piece, Cochrane writes:

But the Fed has crossed a bright line. Open-market operations do not have direct fiscal consequences, or directly allocate credit. That was the price of the Fed’s independence, allowing it to do one thing–conduct monetary policy–without short-term political pressure. But an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials.

Three years ago, while Bernanke’s moves to central planning had been going on for many months, 386 economists signed a letter calling for the Federal Reserve to be independent of Congress. Many of them were colleagues of John Cochrane. I wonder how many of them did due diligence before signing. Were they even aware that the Fed had become a central planner? Hopefully, John Cochrane’s piece and the Hummel piece that backs it up will be noticed. It’s hard to advocate giving huge discretionary power to a large federal agency and at the same time advocate not being able to monitor it, let alone control it.