Necessity as the mother of invention monetary policy after the crisis

situation contrasts sharply with that of the Fed, where the U.S. Congress can change the
central bank’s governing statutes any day it chooses.
Traditionally, the issue of whether the central bank is or is not part of the government
has been elided by appealing to the doctrine of central bank independence in monetary
policy. At least in principle, a sharp line separates monetary policy from a long list of
functions collectively called fiscal policy. 31 According to an unwritten (in most countries)
truce, the central bank is granted control over monetary policy while the elected
government retains full control over fiscal policy. Importantly, each player tacitly or
explicitly agrees not to poach into the other’s territory.
There are good reasons for this division of labor. For example, Alesina and Tabellini
(2008) argue that delegation of decision-making authority to non-elected bureaucrats with
career concerns (as opposed to politicians) is especially beneficial when the tasks are
technical in nature and monitoring quality is difficult. That sounds like monetary policy.
Another important consideration is the extent to which the policy is redistributive, and
thus relies on value judgments and political legitimacy more than on technical expertise. 32
5.2. The crisis and “the line”
The “line” between fiscal and monetary policy seemed at least modestly clear until the
financial crisis. Then central banks around the world were either called upon, or felt
compelled, to take many actions they had never (or rarely) taken before. Think, for
example, about lending to banks on a massive scale (not entirely unprecedented, but very
rare) against collateral that didn’t quite meet Bagehot standards—an action which can
easily slide into a “bailout” of an imperiled bank. Or lending to nonbank financial
institutions. Or purchasing non-traditional assets such as mortgage-backed securities (the
Fed), peripheral country debt (the ECB), and a wide variety of financial instruments (the
Bank of Japan)—just the sorts of “unconventional” monetary policy instruments we
discussed in Section 3.
Each of these unusual activities shares one attribute in common: There is a non-trivial
chance that the central bank, and thus indirectly the country’s taxpayers, will suffer a
loss. 33 For this reason, they are often called quasi-fiscal policies, a term that suggests that
such actions constitute a kind of government spending, which they do in an actuarial sense.
Public spending by the central bank crosses the traditional line between monetary and
fiscal policy, suggesting to some that the central bank has strayed into the fiscal domain.
A number of writers view this as either an inappropriate or a dangerous position for the
central bank to be in. 34
During the crisis in the U.S., politicians and the public were surprised to learn how much
power the Fed actually had. In a famous incident regarding the rescue of insurance giant
31
That list extends well beyond macroeconomic stabilization policy.
32
See Blinder (1997). This view should perhaps be tempered by recognizing that monetary policies have more redistributive
consequences than are normally acknowledged.
33
As an example of an extreme version of suffering losses, Hall and Reis (2015) discuss the implications of possible (technical)
insolvency of the central bank.
34
See, for example, Buiter (2014).
33