Hold on a second... the US federal reserve bank is... PRIVATE?

[albionus]

First, calm down everyone. Most western countries have central banks which are semi-private. From the Wiki article on central banks "In most countries the central bank is state-owned and has a minimal degree of autonomy, which allows for the possibility of government intervening in monetary policy. An "independent central bank" is one which operates under rules designed to prevent political interference; examples include the Reserve Bank of Australia, the European Central Bank, the Bank of Canada, the Banco de la República de Colombia, Central Bank of Norway and the Federal Reserve."

Notice that most countries have state central banks but Europe, Britain, Canada, Australia, and America have semi-private central banks and who has the richer economies? Japan admittedly has a state central bank but Japan is a very different country and even so the greatest bubble and longest recession was sparked by the Japanese central bank due to its close govt ties.

As for the mission of inflation vs growth different central banks will have different polices largely based on the demographics and growth prospects of their country. In the US and Europe the primary concern has been creating the growth necessary for new workers (ie young people). That means letting inflation rise which hurts older people on fixed incomes. In the 70's both America and Europe had many more young people than old people so the focus was on growth.

Now there is a divergence as the US is still having children at the replacement rate while Europe and Canada long ago fell below replacement. That means the focus in the US is still on providing growth for the much larger share of younger people despite higher inflation while Europe and Canada are switching to low inflation despite the low growth since their elderly ranks are growing rapidly and already outnumber the shrinking young population in several European countries.

The other reason central banks lean more towards growth than inflation is that the problems of growth are easier to deal with than the problems of inflation. Add to that, low inflation can lead to deflation which as Japan has learned is extremely difficult to fix.

As for bubbles, they've been happening since the beginning of capitalism and always will (go read up on the Tulip Bubble or the South Seas Bubble). The fundamental cause of a bubble is human nature not central banks. While the US has a housing bubble so too do several European countries. China currently has a massive property and stock market bubble despite a state run central bank. As mentioned the worst bubble of modern times happened in Japan despite a state controlled central bank.

Someone mentioned the gold standard but I'm not even going to respond to that except to say that anyone who thinks the gold standard is a good idea needs to learn more about economics and history. Even a cursory understanding of either would dispel any notion that the gold standard is preferable.

As for Bush's "massive" defense spending it has been really quite small rising only from 2.9% of GDP in 2000 to a peak of 4.8% in 2005 and around 4% this year. A large percentage increase but no where near large enough to affect the economy in any way. It was necessary anyways due to the running down of the military under Clinton's 8 years of "peace dividend" induced military cuts. Indeed, many military minded people such as myself consider Bush's spending still too small.

Oh and sorry to hurt the pride of the British guy who thinks the Bank of England is public but even this parochial American knew that it is a private institution. Wikipedia answers a lot of these questions and it does this one as well, "The Governor and Company of the Bank of England is private institution acting as the central bank of the United Kingdom."