The fallacies of central bank independence

Mark Carney, Value(s): Building a Better World for All. William Collins (2021), 608 pp. ISBN: 978-0008463618 (hb, £30.00); 978-0008421199 (pb, £10.99); 978-0008421144 (e-book, £5.99) Ben S. Bernanke, 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19. WW Norton & Co (2022), 512 978-1324020462 £25.00); 978-1324020479 £25.00) Bank of England Act 1998 marked practical end an extraordinarily rapid global revolution in institutions economic policymaking. By time Labour government, elected 1997, surprised world just days after election with plan independence England, dozens other central banks had already been made independent, or created as independent banks, and Britain become notorious lagging behind this trend. ‘Free at last’ was headline chosen by Economist on 8 May 1997 celebrating Labour's decision, if there great war against imperial power. ‘Resounding welcome day’ choice Financial Times 7 obviously similar reference. Twenty-five years several crises later, arguments can be appraised new light, two recent books bankers themselves – Carney (Governor Canada 2008–13 Governor 2013–20) Bernanke (14th Chairman US 2006–14, then Nobel Laureate 2022) offer fruitful study. There is temptation suppose that case grew directly inflationary experience 1970s ‘political’ policy shown inflationary, so ‘non-political’ tried. Although reference often lessons could supposedly learned, scrutiny facts raises considerable question. It was, all, very political Margaret Thatcher whose government controlled British inflation. French experiment early Mitterrand presidency reversed himself. Even United States, politics appointment Board Reserve, though credit given Paul Volcker ‘independent’ chairman who brought inflation down Reagan period, it remembered President Carter decision appoint him 1979. seek influence members decision-making bodies ECB national performance their tasks.1 Not only bank have all power, but presumed wisdom well, since member states are apparently enjoined never present persuasive argument. Another part picture adoption ‘independence’ related events collapse Soviet system, dissolution USSR, democratisation eastern Europe. These things number states, these others found need governance, little nothing way democratic tradition which ground them. For them, executive body run monetary convenience, well being, increasingly Maastricht, sign modernity. If circumstances went long defining environment consensus appeared, were also notable developments research. surprising thing because academic literature transformed. Up late 1980s, occasional discussion independence, usually treating both questions how might achieved maintained, those its effects, serious matters scholarship. They approached different perspectives, some feel clear-cut answers. But pretence develop namely too easy words, triumph either righteous commonsensical. So, example, Friedman (1962) one criticised idea anti-democratic orientation likely adverse effects policy. His views former rested what he learned interwar Moreau (1954) book banker, portraying dismissive attitude anyone else's view. On latter aspect, emphasised particularly would possibly unduly influenced banks. And feared “since banking community concerned primarily market, led put altogether much emphasis policies policies” (1962, p. 238). Perhaps generalised version point, Chant Acheson (1972) subsequently saw perfectly clearly far they expected pursue own ‘prestige self-preservation’. Their ‘prestige’ included such perceived importance goals, public's others' opinion achieving ‘Self-preservation’ promoted minimisation conflict diminish status, maintenance defensive possibilities lest should arise. ideas, thought, throw light operation Others placed more weight historical study actual behaviour relations governments. In course his Woolley (1984) noted potentially important distinction between sense being able set desired ability achieve goals. general, no agency controls levers relevant objectives, even ‘free’ may still cooperation actors, hence not seem. plenty argue about kinds studies, based analyses incentives faced agents history policymaking countries That natural way, think, addressing complex matter economy. All sort analysis, though, swept aside, when 1980s three seized economists' minds. One collection studies seeking measure according letter statutes treated providing means testing propositions ‘independence’. Alesina Summers (1993) has remained cited, tremendously overrated, example genre. A second conviction discovery acceptance hitherto unappreciated proposition high rates systematically maintain employment spur growth. third ‘credibility’ is, specifically essential success, somehow enhanced granting bank. None stood up critical commentary fact readily accepted shows, than anything else, criticism, willingness advocates consider it. zeitgeist demanded acceptance. difficult resist view opening places committees career economists neither nor helped dull sceptical senses ambitious souls. read scored-up discover degree without regard short-term interests true classic McCloskey (1990) called ‘lawyerly mistake’. structure constraints determines effect any rule, legislators' intent drafting waits tell us we tax industry perfect competitors cost passed consumers law will make clear producer pay. illiterate proposition, know cannot control says does that? When something behavioural aspect introduced assessment sometimes turned out opportunity circularity, discovered Cukierman et al. (1992) developing unrelated statutory measures proved satisfactory making developed countries, turnover rate governors. showed measured index, both, hypothesis reduces thereby confirmed! Of ever believed systematic actually reduce unemployment, I shall pass over mere note,2 renewed not, appeared carried further dubious value. This usefully do, Asset prices simply forgotten; almost seems thought possibility small open economy volatility domestic price level exchange substitute evils, needing traded-off such; point distributive effects. crucial supposed absence list concerns seem viable agencies single objective assessed. basis, said, legitimacy aside: job; trade-offs; individuals charge assess. So far, silly, incorporation ‘theory credibility’, said derived Barro Gordon (1983), into sheen sophistication, route semblance explanation why suddenly limit enthusiasm old voiced support earlier 1980s. How have, newest theories case? credibility arises policymakers face difficulty controlling expectations wage bargainers. general shape problem wish undertaking promising specific future, cases interest believed, resulting private sector create situation optimal promised. Consequently, understands things, believe undertaking, lacks ‘credibility’. much-cited promise deliver low hope inducing increases; does, can, allowing rise, desirable fall unemployment. Hence anticipate inflation, sets increases. case, depend accept recession. Despite theorists credibility, going back Kydland Prescott (1977), certainly including cast ‘the policymaker’, mind, changing identity policymaker dissolved took root.3 achieve, mistake widely doubt partly mathematics theory none understand result fashionable contempt democracy generally. surely became routine intellectual circles agree ‘credibility’, whatever meant, it, however did that. question effectiveness goal really writing models possibilities. one's model role asset prices; financial stability; nor, matter, ‘green transition’, suggest used these. objectives now pushed onto absurd less shocking comment basis narrow scope. Carney's Value(s) banking, author hoped. Playing ‘value’ understood terms, ‘values’ demand broader perspective, writes 100 pages money; 150 ‘Three Crises Value(s)’ financial, Covid, environmental another ‘Reclaiming our Values’. countless examples pride coming before finance. Think dubbed period crisis ‘Great Moderation’. Or four most expensive words English language, ‘This different’. (p. 343) Indeed, think (2004) Moderation’ famous speaking Governors Reserve. There, argued outcomes good luck free shocks understating quality pursued: quite say so, pursued taken prominent thinking. looking feeling ‘this different’ hold crisis, here. running economy, governments wise letting think. Bernanke's Policy States nearly whole 1945, increasing detail goes on. conception describe perceives. relationship unemployment changed; normal long-term decline; systemic risk system growing. really, although provide context policy, real justify fascinating. parts post-war rise common attribution cost-push causes, inadequate response, Volcker's determined approach bringing under control. story familiar enough, account moves along well. Greenspan era gets attention, response pandemic, himself having Chair through former. later parts, obvious command material brings valuable resource issues. He, too, comprehended doubt. apparent remarks makes responses challenges come various points. To take ‘Audit Fed’ proposal 2010 came went, briefly “nightmare” 164) Fed, showing “the Fed ignore politics” 165). What defending independence. shows “we needed public” 167). comes where notes argument certain possible “could powerful ammunition numerous critics Capitol Hill” 187). only, suggests see had, above politics. behaved favouring particular party candidates, kind Quite clearly, account, actor acting interest. note bearing is. thing, personalities involved. Volcker, required Reagan, enjoyed immediate predecessors 43). here away kind. read, goals president. president ‘independent’! Evidently, that, bankers, except stability. uncontroversial lesson quantitative easing experience. extreme presented absolutely necessary leave room naive pronouncements literature. course, accountability assesses regain position centre No longer goal, ways everyone else assess success ordinary processes accountability. Numerous issues raised many bailouts one. But, Lehman Brothers attracts attention. this, raise questions. He explains failure interconnected firm induce panic throughout reason organising rescue Bear Stearns March 2008 (pp. 125–6). However, attempts save nowhere, allowed fail September, whereupon worse. puts experts' insolvent rather merely short liquidity, reason, permitted act lender last resort. option let fail. fuller same events, Geithner, Paulson (2019, 70) “We rescued have”, explaining (Secretary Treasury 2006–09) “negotiating tactic” 65) try rescue. muddle somewhere accounts since, prohibited contributing funds, Paulson's remark statement oddity sound like law. Apart better negotiating tactic. work Ball (2018). detailed analysis Lehman's balance sheet treatment aims show power lend Lehman, argues done possible. must debate. inconsistencies official done, minimum clear. hard adjudicate, Ball's hardly negligible. yet receives Bernanke. there, whether acted politically, lack public indifference. staffed ‘experts’ takes decisions, rest live happens, write it? ago, side sceptics, recognise outstanding necessity persuading Congress legislative steps address fall-out crisis. Precisely powers sense. terms firmly past. Fretting hypothetical surprise labour market bursts has, thankfully, disappeared, issue ‘forward guidance’ place. first explicit appearance 2003, started drop hints overestimating likelihood increases, due moved indicating remain time. statements future which, intended effect, wants implement. Here, recovery, rates. Such thoughts commonplace literature, Svensson (2003). thinking sincerity commitment problem. appreciate as: probability, minor, unwelcome substantial exceeds pickup level” 96). meaning clearer. Why be, trying precise calibration strength hints? wanted markets thinking, telling them was? Anyway, hint otherwise, understanding believing bad obscure enhance status magnifying Goodfriend (1986) ‘mystique’ banking. plain English, all. idea, completely persuaded economics profession We sure Anderson again. complacent realise full threats signs anxiety best respond. complacency there. Moreau, convinced calls realised legitimate doubts every page summed successor, Jay Powell, responded Trump's habit expressing makers. Powell “regularly publicly emphasized allows decisions data considerations” 230). … emphasise opinion, express so. fact. challenge, ill-motivated, stupid, perhaps mistaken. guard value Fed's doubted. As highly regarded. tied closely, preceding years. damage moderation failed prevent, cause, 2007–08, banks' appropriate; tolerably well-managed, considered; brave. Are handling Covid? loose. large extent provided liquidity. aggregate fell, reasonable confidence severe fall-out, greater reserves before, opportune Covid amount easing. liquidity Sure supply fell: people told stay home. Did danger confidence, leading depression? did, money sensible bring locked-down workers work? therefore oddly describes return “2008 playbook” 260). Yes, Ukraine, playbook appropriate escape share blame arose ‘political interference’ testimony bank's using. scholarly disgrace. intellectually much-vaunted ‘credibility theory’ proposal; mistake’ reading flew first-year undergraduate's significance constraints; simple correlations demonstrate rejected hand examiners Master's degree, circularity selecting correlation variable explained. professional disgrace, eliciting contrarian comment. gigantic groupthink. alleviate gain ideas. Complacency desirability followed near-unanimity developed. threatening, terrifying, itself. dangers. forgets case. rejecting beginning, now. written fine period. fantastically well-informed, insightful clever faced. such, irrelevance At each evidence points hollow vacuous, gained credence. way. while show. completed challenge form resurgent appearing. Independent caused that; happening. true, previously important, job acquired others. essence advocacy brings, guess Milton say, concern precisely left rates, enough quantity money, hence, ineffective