[britain] an independent central bank is the thin edge of the wedge

The arguments for an independent central bank include:

• lower inflation
• improved credibility
• reduced political short-termism

The arguments against an independent central bank include:

• a `deflationary bias’ may lead to higher unemployment
• reduced policy flexibility
• undemocratic [1]

Arguments for: The first is generally accepted. The second is highly questionable for the same reason the third is unsustainable. The third reason ‘for’ does indeed eliminate political short termism and replaces it with long-termism of the cabal, which is the whole point of the exercise in the first place e.g. with the ECB. Lesson is Jeckyl Island, 1913, in the US.

In the early decades of the Federal Reserve, responsibility for formulating and implementing monetary policy was not centralized in the Federal Open Market Committee, or FOMC, as it is today. Instead, the twelve district banks undertook open market operations and set the discount rate for banks in their areas, which required the Board's approval. In 1922, the district banks created their own committee to coordinate their open market activities.

Since 1935, the FOMC has existed in its current form.On the question of the Fed, these were some of the concerns:The debate surrounding the creation of the FOMC pitted some members of Congress who wanted only the Presidentially-appointed governors in Washington to set monetary policy against others who wanted the regional Reserve Banks to continue control of the Committee.

The compromise reached allows all seven governors and the president of the Federal Reserve Bank of New York a permanent vote on the Committee but only four of the remaining eleven district bank presidents a vote at any time. This compromise reflects that delicate tension of checks and balances on centralized authority that lies at the core of the Federal Reserve System today. [2]

The independence and political neutrality of the central banker is hotly disputed. The very thing which is desired is never possible the more polarized the society is. And in a society with Eurosceptics, wets and dries, such polarization must exist:According to Christian Schultz, a polarisation of politics in a country can have a profound and potentially dangerous influence on the choice of central banker, reflecting the colour of the government rather than the needs of the economy.

This can have very damaging consequences as demonstrated in the Reagan-Thatcher years, when stabilisation policy was often the outcome of political attitudes rather than an appropriate response to economic shocks.A good example of Schultz’s model in action is its prediction that a right wing president like Reagan will appoint a central banker, who vigorously fights inflation even when the economy is at the bottom of the business cycle - something that actually seemed to occur just as it did during the Thatcher era in the UK.

In the 1980s, the French government and central bank fought unemployment with very active stabilisation policies while the Bundesbank pursued the opposite policy, although under very much the same economic conditions.The ‘diminishing of political influence’ argument is spurious. The same interested parties are in positions of influence, whatever the outward manifestation. [3]

Samuel Brittan said: The ECB may have a slight advantage [over the Bank of England] because its mandate cannot be changed without an amendment of the Maastricht Treaty, while Parliament could theoretically change the status of the Bank of England at any time; and some future Chancellor could emasculate it by inappropriate inflation guidelines. As I mentioned in my oral evidence, the ECB has come in for quite unfair criticism for lack of transparency and for supposed excess deflationary zeal. [4]

Lack of transparency. Cannot be changed without an amendment. There it is in a nutshell. The power to legislate on interest, liquidity and inflationary pressures, independent of control and mandate from the electors.

From The Hindu: The FOMC, which is charged with the responsibility of determining US interest rates, has been around for as long as one's memory, as has the European Central Bank (ECB) — which has full freedom to act on interest rates — and its German predecessor, the Bundesbank. But the Bank of England's Monetary Policy Committee (MPC) is a recent creation.

Before the UK did it, Australia and New Zealand `autonomised' their central banks giving them total flexibility on interest rates, provided Government-set inflation targets are met.[5]An Independent Central Bank is not a good idea under today’s pressure for globalization and the underwritten conflicts of the Middle-East and elsewhere; and the ECB is certainly not to be countenanced for even one moment.

[1] cam.uk
[2] William J. McDonough: An independent central bank in a democratic country[3] christian schultz
[4] Samuel Brittan: Attitude to Independent Central Bank[5] S. Balakrishnan: Beginnings of an independent central bank

posted by james higham at Wednesday, August 09, 2006