Friday, May 18, 2012

Central Bank Independence not so well intentioned failure

Chris Giles, the economics editor of the Financial Times, thinks, rather surprisingly, that central bank independence (CBI) has been a failure, in England at least. In his own words: "with the benefit of hindsight, the first 15 years of BoE [Bank of England] independence should be seen as a well-intentioned failure."

His views hinge on the question of public control of central bank behavior. For Giles a well informed public could have pushed the BoE to act more boldly after the 2007 financial crisis, and to be more prepared for the global crisis that started with the Lehman collapse in 2008.

While I agree that CBI has been a failure -- and not just in England (yep ECB is what I'm thinking) -- and also agree that there is no reason why fiscal policy is more directly scrutinized, than monetary policy, by the people's representatives in parliaments in most countries, I would disagree that the mistakes have all been well intentioned [that might also explain why the BoE is fighting reforms, something that puzzles Mr. Giles].

The problem actually lies in the fact that a CBI is by definition not coordinating with the Treasury on fiscal policy, and in some cases might be forbidden to do basic things like buying government debt. The justification is the fear of inflationary pressures, while the truth might be closer to Kalecki's view that fiscal and monetary policy are used to maintain a significant level of unemployment to keep workers in line. The intentions behind CBI are not so pure as Mr. Giles assumes.

CBI means that the objectives of monetary policy are not to be discussed by the public. In the case of England, as well as Europe (and even the US), the problem is that more fiscal policy is needed, and more support from their central banks should follow.


  1. For good or for ill, it seems we share quite some concerns, NK.

    I myself have been puzzled by the reverential awe journalists, economists and sundry pundits show towards our RBA.

    In October 2009, two weeks after the "G20 Leaders' Statement", was signed by Treasurer Wayne Swan and RBA Governor Glenn Stevens (Pittsburgh Summit, September 25, 2009), the RBA decided to hike interest rates.

    In the Summit all signatory parties agreed to sustain their policy response to the crisis and to reduce it only in a coordinated fashion.

    This month, nearly two and a half years down the track, both Treasury and RBA acknowledged they overestimated the strength of our mining boom.

    In the meantime, the RBA increased interest rate (on account of the "mining boom") to the point that the AUD was buying about USD 1.10, pushing a lot of local manufacturers and farmers out of business.

    You'd have thought politicians, journalists, talking heads and even the affected parties would be jumping all over the place demanding explanations. Right?

    Nothing. The faith these people seem to have on the RBA "mandarins" defies rational explanation.

    1. Yes, but in part it maybe that FT and other media, like The Economist and several other around the globe, are part of the problem. They fake being in awe to support policies that benefit only a few. Of course as journalist once in a while they have to deal with reality.

    2. I know and I agree that there's a lot of media manipulation.

      What surprises me is that the manipulation is so devastatingly effective.

      I mean, some fool will invariably pop op and buy the snake-oil salesman's wares. But here we're not talking about some isolated fool, but virtually the whole nation.

      And this has happened in Australia for two and a half years!

      Typically, RBA meetings are preceded by all sorts of speculation about where interest rates are heading. Often these guesses are quite reasonable. I mean, we have reached a point where everybody and their dogs can see what's obvious: the economy has been slowing down.

      More often than not, the result is that the decision contradicts these opinions. Then everybody and their dogs engage in a paroxism of second-guessing the RBA. What doesn't seem to cross their minds is that unthinkable possibility: what if the RBA is mistaken?

  2. I agree 100%... and also think that "fear of inflationary pressures" is code for "suppress wages".

    1. Newspeak. Things don't have the same meaning in economics now.


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