Mo money supply, mo problems
A license to print money doesn't buy any easy answers on central bank independence
By Stephen Bank, Staff Writer
Issue date: 2/4/10 Section: Opinions
On Jan 28, the United States Senate confirmed Ben Bernanke as Chairman of the Federal Reserve. In doing so, America's elected representatives exerted more control over monetary policy than they will be able to for the rest of Obama's term. The Federal Reserve is an "independent entity within government." Congress and the President can't tell the Fed what to do, and no one can fire the Board of Governors over policy disagreements.
The Governor of the Bank of Canada is only slightly more accountable to the electorate. Parliament can fire him or her, as occurred in 1961 when John Diefenbaker tried to fire then Governor James Coyne. Diefenbaker was shut down in the Senate, but Coyne resigned the next day. The same thing probably couldn't happen today. Central bank independence is stronger, and Diefenbaker was a megalomaniac, even for a prime minister. In Canada and the U.S., politicians and central banks leave plenty of room for the holy spirit, but in Europe, politicians aren't even invited to the dance. European Union political institutions are legally debarred from trying to influence their monetary policy in any way.
This might all seem inane, but monetary policy is one of the most important ways for government to influence the economy. Shouldn't such powerful institutions be subject to more democratic oversight? Defenders justify central bank independence the same way the Chinese Communist Party justifies its power, albeit on a smaller and much more benign scale: legitimacy doesn't come from the will of the people, it comes from results. And the evidence shows that independent central banks do restrain inflation. Nevertheless, central banks still suffer from the same problem as all undemocratic and quasi-democratic institutions: nothing moors them to the needs of citizens.
John Dewey said that "the man who wears the shoe knows best that it pinches and where it pinches, even if the expert shoemaker is the best judge of how the trouble is to be remedied." This is the problem with monetary policy in general, and Ben Bernanke in particular. Mr. Bernanke is a scholar of the Great Depression, and has written extensively on unconventional monetary policy. The liberal economist Brad DeLong wrote on his blog that "...Bernanke is one of the best in the world for this job - I cannot think of anyone clearly better." No serious observer doubts that Bernanke is qualified, but not all disagreement about monetary policy is technical; some of it is a matter of judgment, and some is based on good old-fashioned class conflict. Garden-variety inflation disproportionately hurts the rich, while unemployment disproportionately hurts the poor. Bernanke hasn't taken the necessary steps to deal with unemployment, simply to avoid the risk of inflation. The European Central Bank doesn't even consider unemployment; its only job is to watch out for inflation.
I'd like to think that more democratic oversight could improve central banking. Since the financial crisis, Ron Paul's movement to "audit the Fed" has gained traction across the American political spectrum, and I have trouble opposing it. But after watching YouTube videos of Ron Paul spouting fringe economic theories while questioning a visibly annoyed Ben Bernanke, not only would I like to increase central bank independence, I'd like to stop having elections altogether. Central banking independence isn't a simple issue, and there are legitimate arguments for and against it. But I fear that the current consensus in favour only exists because it favours the wealthy, and frankly, the issue is too technical and boring to capture the public's interest.
The Governor of the Bank of Canada is only slightly more accountable to the electorate. Parliament can fire him or her, as occurred in 1961 when John Diefenbaker tried to fire then Governor James Coyne. Diefenbaker was shut down in the Senate, but Coyne resigned the next day. The same thing probably couldn't happen today. Central bank independence is stronger, and Diefenbaker was a megalomaniac, even for a prime minister. In Canada and the U.S., politicians and central banks leave plenty of room for the holy spirit, but in Europe, politicians aren't even invited to the dance. European Union political institutions are legally debarred from trying to influence their monetary policy in any way.
This might all seem inane, but monetary policy is one of the most important ways for government to influence the economy. Shouldn't such powerful institutions be subject to more democratic oversight? Defenders justify central bank independence the same way the Chinese Communist Party justifies its power, albeit on a smaller and much more benign scale: legitimacy doesn't come from the will of the people, it comes from results. And the evidence shows that independent central banks do restrain inflation. Nevertheless, central banks still suffer from the same problem as all undemocratic and quasi-democratic institutions: nothing moors them to the needs of citizens.
John Dewey said that "the man who wears the shoe knows best that it pinches and where it pinches, even if the expert shoemaker is the best judge of how the trouble is to be remedied." This is the problem with monetary policy in general, and Ben Bernanke in particular. Mr. Bernanke is a scholar of the Great Depression, and has written extensively on unconventional monetary policy. The liberal economist Brad DeLong wrote on his blog that "...Bernanke is one of the best in the world for this job - I cannot think of anyone clearly better." No serious observer doubts that Bernanke is qualified, but not all disagreement about monetary policy is technical; some of it is a matter of judgment, and some is based on good old-fashioned class conflict. Garden-variety inflation disproportionately hurts the rich, while unemployment disproportionately hurts the poor. Bernanke hasn't taken the necessary steps to deal with unemployment, simply to avoid the risk of inflation. The European Central Bank doesn't even consider unemployment; its only job is to watch out for inflation.
I'd like to think that more democratic oversight could improve central banking. Since the financial crisis, Ron Paul's movement to "audit the Fed" has gained traction across the American political spectrum, and I have trouble opposing it. But after watching YouTube videos of Ron Paul spouting fringe economic theories while questioning a visibly annoyed Ben Bernanke, not only would I like to increase central bank independence, I'd like to stop having elections altogether. Central banking independence isn't a simple issue, and there are legitimate arguments for and against it. But I fear that the current consensus in favour only exists because it favours the wealthy, and frankly, the issue is too technical and boring to capture the public's interest.
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