By: Larry MacDonald

Let’s Volckerize the Fed. That’s the catchy title of a breakingviews.com piece by Martin Hutchinson on the need to stop the Federal Reserve from putting the world economy through a succession of credit binges and increasingly excruciating hangovers.

Paul Volcker, as you may recall, was Fed chairman from 1979 to 1987 and he was credited with taming the double-digit inflation of the 1970s. He was successful because he was given a free hand. Now it’s time to institutionalize greater independence in the Fed so we can have more Paul Volckers, writes Hutchinson.

That means making the Fed less of a decentralized institution. It also means doing away with the dual mandate to promote both price stability and full employment in favor of a primary focus on price stability.

I would add that price stability should be defined with reference to asset prices as well, not just prices of consumer items. In my opinion, the monetary excess was not just a reflection of political meddling and a dual mandate but also a policy error – i.e. an inappropriate definition of price stability that allowed monetary policy to become too loose.