For one thing, central banks are not charged with
distributional policy issues. That lies solely in the realm of government. If governments
have not used the fiscal space created by the lowest interest rates in history,
which after all were delivered by central banks, that is purely their own
fault. Moreover, at a time when governments have been conducting an
aggressively tight – and pretty regressive – fiscal stance it makes sense to
keep monetary policy as lax as possible. It is called policy coordination and
is what the Fed did during the first term of the Clinton Administration of
1992-96. We might not like the fact that interest rates remain at their
emergency lows after eight years, but monetary policy prevented a much more
dramatic collapse than might otherwise have occurred. With central banks having
done the heavy lifting for all this time, what politicians should now be saying
is, “thanks, we will take it from here."
Threats to central bank independence are not new, of course.
The US Fed has been subject to Congressional badgering for years, as Alan Greenspan’s autobiography makes clear.
The ECB’s unconventional policy measures have routinely been scrutinised by the
German Constitutional Court, to ensure that they do not fall foul of the letter
of the law. But is central bank independence all it is cracked up to be?
The independent central bank par excellence is the
Bundesbank, which successfully delivered low inflation and stable growth for
Germany for almost 50 years. Whilst the academic evidence suggests that they do
deliver lower interest rates than non-independent central banks, this may be
more to do with the trend towards more independence at a time of low inflation.
Indeed, like many other aspects of monetary policy, they may simply be a fad
which serves a purpose for a while but ultimately fall victim to a change in
economic fashion, like monetary or exchange rate targeting. Indeed, there has been a
tendency in the last 20 years to entrust the running of central banks to
academic economists, not career bankers. Whilst they undoubtedly have a better understanding
of monetary theory, which has allowed them to be more creative at finding
solutions as interest rates hit the lower bound, I wonder whether the more restrained
bankers of old would have been quite so tolerant of the liquidity build-up
which contributed to the crash of 2008-09?
There is a school of thought which says that independent
central banks were created to solve a problem which no longer exists – the reduction
of inflation to tolerable levels – and that whilst they may be good at slowing
the inflation process, they are not so good at reflating economies. There may
be something in this, and we should not overlook the fact that the biggest financial
crash in history took place on the watch of independent central banks. So there
is nothing mystical or immutable about their independence. But the point of independence
is to allow them to do things that politicians do not always like. Sometimes
these things may be inconvenient, but if politicians want to change the landscape
they need to have a grown-up discussion about the mandate, not issue threats.Political dialogue? There's a novelty!