Simon Wren-Lewis asked a good question yesterday, Can Central Banks Make 3 Major Mistakes in a Row and Stay Independent? He pointed out that the central banks (the Federal Reserve, Bank of England, and so on) are primarily responsible for the housing bubble and resulting market crash. Then, when the governments stupidly turned to austerity, the central banks did nothing — in particular, they didn’t make it clear to policy makers that they really had no tools at their disposal. And the third mistake, Wren-Lewis thinks, is this big push now for the central banks to “normalize” the situation. By that, they mean raise interest rates back to where they would normally be and not right at zero.
Wren-Lewis’ concern is that the central banks acting so badly will cause them to become controlled by elected officials. He thinks this is a bad thing because he looks back to The Great Moderation after Paul Volcker and others tamed the business cycle. I appreciate that way of thinking. At the same time, the central banks are unaccountable plutocratic institutions. Today in the United States, the Fed doesn’t seem to care about workers. It seems only interested in doing the bidding of the banking industry.
I think it is very interesting that when the European Central Bank was formed, it was not given a dual mandate to stabilize prices and maximize employment; it was only given the mandate to stabalize prices. This fact almost caused the EU to break apart in 2010 when the bank didn’t seem to see its purpose as being the lender of last resort. But the point is that things have changed so much since the 1960s when it was generally agreed that people needed jobs. Now the plutocrats are in charge and all they care about is making their own lives better.
So it’s kind of hard for me to think that making central banks dependent upon the whims of democratically elected officials is all that bad. As Simon Wren-Lewis noted, “What central banks should be doing in these circumstances is allowing their economies to run hot for a time, even though this might produce some increase in inflation above target.” But instead, we are getting the opposite. After years of stagnant wage growth, the first sign of increasing wages makes them freak out and want to slow the economy. As Dean Baker always says, this is a decision to put millions of people out of work.
As long as we have a central bank that cares only about the interests of the financial industry, I think it is a mistake to have it independent. In that case, no matter how good the government’s fiscal management, regular workers will continue to see their wages stagnate. And they will be the lucky ones in that they at least have jobs. The Federal Reserve has been unable to help the American worker for almost a decade, but can (and apparently will) hurt the American worker as the economy improves. This makes me wonder about independent central banks. We the people have to take control — either directly or by putting better people in them.