Central Bankers Losing Independence?
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  • Mrs. Davis

    In theory anyway, the central bank concerns itself purely with inflation rates and monetary policy

    Since Humphrey-Hawkins the Fed has been forced by law to concern itself and its policies with full employment, growth in production, price stability, and balance of trade and budget. Let’s see, Humphrey-Hawkins was signed into law by James Earl Carter in 1978. That it has taken this long is only due to Paul Volcker and the amount of ruin in a nation.

  • Anthony

    Robert Samuelson has posited that we live in a world of broken models – economics models U.S., Europe, and China rely on may be collapsing. His article (Washington Post) adds perspective to Central Bankers Losing Independence – economic and monetary management.

  • Jacksonian Libertarian

    The problem is deficit spending, if governments were required to balance their budgets every year, then there wouldn’t be a problem. Only the TEA Party can save us from the ugly future the tax and spend leftists have in store for us.

  • An excellent post, Professor Mead! I’d add to what you said that the central banks are being blackmailed not only by the politicians but also by the financiers as well.

    They’re loaded up with so much toxic debt that any serious move away from easy credit could topple their derivative empires quite quickly. This ends up putting the central banks between a rock and a hard place.

    Paul Volcker never had to deal with these levels of public or private debt. That’s a BIG difference between what we faced in the 70’s/’80’s and what we face today.

  • chase

    Our political system is the problem. If we had a Westminster system, at least the party that wins the election could implement its policies. I would vote for Obama or Romney if I knew that he could actually implement his program. Our system requires compromise, and that is not what is happening. In the UK, at least Cameron can govern. The labor mps aren’t able to threaten not to pay outstanding debts, thereby putting the whole global economy at risk.

    Under a Westminster system, we would not be having elections every two years, which create too much instability. Also, under a parliamentary system, voters will know who is to blame for policies that they do not like. Under our system, Congress and the President get to blame each other and there are no clear lines of accountability.

  • Walter Sobchak

    I think we need to develop some cynicism about the central banker’s posture.

    The pretense that some things that the State does are purely technical and that they should be done by disinterested technocrats without accounting to or supervision from the democratically elected representatives of the people, is of itself, a political claim. This claim is characteristic of the “Progressive” (in the US), Social Democrat (in the EU), or Blue Model (in Via Media).

    Seen in this light. you can understand why I think Central Bankers should be treated as the political players they are and given no more independence than we give any other gang of criminals.

  • Mark

    So what you are saying is that bad fiscal management by the government forces the central bank to do more than it should, right?

    The choices for fiscal policy have been (1) Do nothing. (2) Austerity. (3) Krugmanesque policies.

    One and two have not worked, so I guess you are suggesting three?

    • Walter Russell Mead

      @Mark: Fiscal policy isn’t the only thing in the world besides monetary policy, and many of the problems in Europe stem from the rotten design of the monetary union rather than specific fiscal policies. Those are the political errors central bankers are being put in the position of trying to treat on an emergency basis.

  • I may be seriously oversimplifying things here … but haven’t we been/aren’t we inviting economic trouble by treating the yardstick of economic value – money – like it was made of Silly Putty in order to achieve social/political objectives?

    I’m not advocating a return to the gold standard, mind you … because of the logistical problems I see in having every dollar backed with gold.

    But it may be prudent for the world to consider treating monetary value as a standard, like it treats the meter and the kilogram … instead of leaving our leaders susceptible to the temptation of putting their thumbs on the economic scales.

    Yes, the gold standard had its problems … but what we have now isn’t working all that well, either. Is there another alternative out there?

  • cas127

    “a fiat money system gradually loses credibility”

    Gradually?!

    The USA has been engaging in near ZIRPs for about a *decade* now.

    Gold has soared. Oil has soared.

    The only thing saving the dollar (and by extension, every other Western fiat currency) is the mental/psychological/politico-legal obstacles that the majority of people in the West have to a fiat currency alternative.

    But when the psychology snaps – the changeover to an alternative will be very quick.

    Fall-of-the-Soviet-Union-quick.

  • DH

    Central planning has failed in all other areas of the economy. Why do we expect it to succeed in banking?

    The solution is not to somehow provide more “independence” for central bankers (as if we could somehow turn them into detached Platonic philosopher kings). The solution is to get rid of central bankers and fiat money.

  • LarryD

    @chase, we get a divided government because the voters often want a divided government.

    In our system, the candidate has to build a winning coalition of voters before election day, in a parliamentary system the winning coalition is formed after the election is over.

    There is no perfect system.

    Part of these problems are intrinsic flaws of fiat money, but hard money has an inherit problem too. Its virtue is also its vice, hard money can’t be expanded fast enough for a growing economy.

  • boqueronman

    Wow! The lack of understanding in this article is astounding. The Bernank is a neo-Keynesian. This is an economic theory that has been falsified. (Look up what that means!) I suppose you could say that the politicians are at fault. But why? Because they too are neo-Keynesians. How could they not be when it gives them permission to spend literaly unlimited amounts of money to buy votes. The per capita (each man, woman and child in the country) public debt now (12/31-11) stands at $37,000. For a family of four this means $148,000. To put this in perspective the median home value at end 2011 was $175,000.

    The total public debt may not seem like much in the era of ZIRP but wait until interest return to their historical level. Hint: almost half of the current tax revenue available will have to be used to pay the interest on public debt. No, it’s not “the politicians” that are the problem. It’s the neo-Keynesian economic theory that must be trashed, before we enter the world of Greece. Seriously WRM, you need to educate yourself. Start by regularly reading the Zero Hedge website to get a taste of the (rather bitter) real world. Then read some Austrian economists, Mises, Hayek and Rothbard. Your world will never be the same.

  • Tom

    100% of the problem is excess gov’t spending — in the good times. Clinton spent too much, then the Bush tax cuts were good, given the dot.com bubble pop, but increasing other gov’t expenses was bad. Obama has been a disaster.

    But the democracy problem is that voters want, and more importantly are willing to vote for, higher gov’t spending. Voters, and media, have to accept that gov’t deficits can and do become unsustainable.
    And people have to be against it.

  • PTL

    What independence? The mob has the keys to the mint.

  • Corlyss

    “In most western countries, central banks are, at least in theory, wholly divorced from the political process.”

    That’s a real knee-slapper. It hasn’t been true since the 70s at least. This latest round of economic woes has seen the central banks print money (quantitative easing) to prop up politicians’ screwed up policies all across the western world.

  • teapartydoc

    Bring back the solidus.

  • Walter Sobchak

    Ritchie The Riveter says: “I’m not advocating a return to the gold standard, mind you … because of the logistical problems I see in having every dollar backed with gold.”

    This is the problem that fractional reserve banking (or, just plain banking, as it is better known) was invented to solve. Only, a tiny amount of high powered reserves are required, banks can safely carry deposits far in excess of the cash they hold.

    DH says: “The solution is to get rid of central bankers and fiat money”

    Fiat money and central banks are distinct phenomena. Recall that there were central banks such as the Bank of England for a very long time before fiat money became popular.

    LarryD says: “hard money can’t be expanded fast enough for a growing economy.”

    This is just wrong. The fastest growth any economy ever saw was in the US in the late 19th and early 20th century, a time when the country was on the gold standard. The only growth that hard money cannot accommodate is the growth of the socialist state.

  • MlR

    Why does hard money have to expand?

    Is it not a commodity, whose individual value rises and falls with demand?

  • Jeff W.

    Pressured by government and big banks, the Fed is required to print enormous amounts of money without causing inflation. That is the job it must do.

    But few people understand that destructive economic policies are needed in order to facilitate noninflationary money printing. Moving manufacturing jobs to Asia, open border immigration policies, a low minimum wage, relentless pressure on women to join the workforce: all of these policies have been needed in order to suppress wages so that trillions can be printed without causing inflation.

    The average wage of American workers has been continuously declining since 1973. That is the direct result of policy decisions that have served the interests of the central bank.

    Far from being apolitical technicians, the Fed has been influencing public policy for many years. The effect of the Fed’s favored policies has been that the Fed, the Federal government, and big banks have all grown richer, while the majority of Americans have grown steadily poorer.

  • Georgiaboy61

    Professor Mead, you are entirely too-forgiving concerning central bankers. Nathan Mayer Rothschild, of the infamous Rothschild banking dynasty, once said, ““Give me control of a nation’s money and I care not who makes the laws.” The Federal Reserve has debased the value of the USD by over 90% since its creation in 1913, via the silent theft of inflation. The Fed, like its many counterparts in other nations, is effectively a pseudo-criminal cartel, unaccountable to anyone or anything, except other members of the global economic elite.

  • cubanbob

    chase says:

    You can’t possibly be serious. The UK is hardly a model of fiscal probity. And as for the Southern Europeans well the have a parliamentary system also, hasn’t done them much good lately.

  • Soul

    That has been my thought for awhile, central bankers are not independent from political wishes. If politicians began talking against what was being done, I’m guessing they would leave their position.

  • Mike Mahoney

    @Larry D-“Part of these problems are intrinsic flaws of fiat money, but hard money has an inherit problem too. Its virtue is also its vice, hard money can’t be expanded fast enough for a growing economy.”
    That solution is simlple: lowering prices. It is a natural response in a free market-hard money system to productivity outstripping specie supply. The problem is the (once again) political resistance to the natural solution.

  • Mark Michael

    7. Mark says:
    June 25, 2012 at 4:48 pm
    So what you are saying is that bad fiscal management by the government forces the central bank to do more than it should, right?

    The choices for fiscal policy have been (1) Do nothing. (2) Austerity. (3) Krugmanesque policies.

    One and two have not worked, so I guess you are suggesting three?

    Walter Russell Mead says:
    June 25, 2012 at 4:55 pm
    @Mark: Fiscal policy isn’t the only thing in the world besides monetary policy, and many of the problems in Europe stem from the rotten design of the monetary union rather than specific fiscal policies. Those are the political errors central bankers are being put in the position of trying to treat on an emergency basis.

    MY RESPONSE:

    WRM’s response is awfully vague. Suggest you try being concrete – it will force you to face what you really believe & understand about macroeconomics! (Can’t be a fuzzy “Foggy Bottom” person when it comes to economics IMO.)

    Thought experiments that might show what I mean:

    1. What if the ECB used its existing powers and funds when Ireland got in trouble to (a) demand that the creditors of those troubled Irish banks take a haircut of a certain fraction of their investments, (b) Ireland’s government put up a certain amount of public funds, before they, the ECB, would agree to backstop the Irish banking system with a certain amount of euros?

    The big problem with the Irish bailout is that they made the banks’ creditors whole, dollar-for-dollar, and put the whole burden on the Irish taxpayers and on the ECB, which amounts to the taxpayers of the 17 eurozone countries.

    I’d brashly claim that Ireland would be out of trouble today if they had done this. No additional rules, laws, powers were needed to do this – just better judgment by those involved.

    Ireland and its citizens have been very patient and adult in their dealing with their severe recession. The government has slashed government spending of all kinds more so than raising taxes, although they have raised some. Re: they have 14% unemployment. That will not be solved by government spending – a Krugman-style approach has never worked anywhere. The private sector creates sustainable jobs that expand the economy and reduce unemployment, not the government. Deregulating the labor market so wages are less “sticky” would help to reduce unemployment. That’s mostly a country-by-country issue.

    I see no reason the above approach to each eurozone country that got into trouble could not have been dealt with in a similar manner. You would have to adjust the details for the precise situation in each country.

    No additional laws or rules would be necessary that I am aware of.

    For example, Greece’s problem has been the government has been spending way more than they have taken in in taxes. They cooked the government’s books, trying to deceive their eurozone partners and the ECB. They lied about their “austerity” measures for a long time. Promised to do them, and didn’t follow through. Then they kept the government workers on the rolls, didn’t cut their compensation – and imposed higher taxes on the private sector!

    BUT, once the ECB and the other EU countries figured this out, they could have devised a strategy that swiftly told both the Greek government and its citizens that the game was up. Government must cut its scope, # of employees, their wages on a certain scale (over time), the bank creditors must take a big write-down on their loans to Greek banks, and as they did this – AFTER a proven step – the ECB would provide credit to the banks. It would be increment by increment as the Greeks did their part first.

    If they refuse to cut government spending, no ECB funds. Foolish things like defining all sovereign debt as having zero risk can be changed without adding to the laws and regs defining the ECB, the 17 central banks, and the euro, I’d think.

    In fact, the ECB/EU did learn the lesson that the private bank creditors had to share in the pain when they last dealt with the Greeks – unlike how they dealt with Ireland.

    Re: Austerity via spending cuts versus tax increases.

    Textbook Keynesianism fiscal stimulus can be either running annual budget deficits by (1) spending increases, (2) tax cuts, or (3) some combination. It makes the assumption that running a deficit will stimulate the economy and it doesn’t matter if it comes by extra spending (without raising taxes enough to match) or by cutting taxes (without cutting spending enough to match).

    Similarly, “austerity” can come about by spending cuts or tax increases for a Keynesian macroeconomist.

    I would brashly claim that textbook Keynesianism has been shown to be false experimentally.

    I would claim that there are precisely zero countries that came out of a severe recession (for sure one caused by a financial crisis) by large amounts of government deficit spending over a sustained period. There are examples of countries coming out of a severe recession with a Keynesian stimulus by deficit spending by predominately cutting taxes. The obvious example is our the Federal Reserve-caused severe recession of 1981 – 1982. Reagan cut the income tax 25% across the board.

    We had a big fiscal deficit for several years, yet the economy grew at 6% to 8% a year for several years. Reagan did not cut spending, but he slowed its rate of increase substantially. (Domestic programs dropped as a percent of GDP.)

    Japan has had a textbook Keynesian fiscal stimulus via almost purely government deficit spending. They’ve done this for almost 20 years. They have had little or no growth the entire time – maybe 1% or 2% some years. Their national debt is now over 200% of their GDP. The only reason the private investors have not abandoned Japanese banks is because Japanese citizens have huge private savings that they put in the Post Office which turns around and buys up Japanese Treasury bonds, notes, and bills!

    BTW, that game has to stop at some point. “An unsustainable trend…will not be sustained!” (As Herb Stein famously said.)

    Oh, boy. This is way too long & I’ve not clearly made my point. But I’ll reassert my thought: The current ECB rules and eurozone setup does not need more laws, powers. It just needs ECB bureaucrats with better judgment.

    PS. Estonia had a big financial crisis and they dealt with it via major spending cuts across the board. No tax increases. It was brutal, but they have begun to grow again. I think their GDP grew at 6% or more in 2011.

  • @15 – PTL says: “What independence? The mob has the keys to the mint.”

    The more I think about this comment, the more I realize that PTL makes an excellent point here. The fundamental problems affecting the Fed are the same problems that rise from the primary downsides of democracy (particularly direct democracy as practiced in the USA today).

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