Hmmm. Interesting question. Should central banks be independent? The Bank of Canada ultimately answers to the people through the Minister of Finance, but as they are quick to point out, operate with considerably more independence than other federal institutions.
Is that a good thing, keeping the banks free to run the mechanics of policy without political considerations, or a source of risk (see: United States)?
Leaving aside the question of whether it is a good idea to use these reserves to pay off international creditors – something that perhaps only the future will tell – is there a good reason why central banks should be “independent” of their elected governments?
The business press, which has the support of the vast majority of economists on this question, thinks there is. The basic argument is that if the central bank is not able to determine monetary policy free of “political considerations”, then politicians will force the bank to be “too loose” with monetary policy and the country will end up with dangerously high levels of inflation.
This would seem to be a tough argument to swallow for anyone who believes in representative democracy. Fiscal policy – the government’s decisions with regard to spending and taxation – is also a major determinant of economic activity. There are important tradeoffs that affect the livelihood, income and employment of most of the population. Yet in the US, these decisions are entrusted to our elected representatives in Congress, together with the executive.
There is no obvious reason why monetary policy – the central bank’s decisions with regard to interest rates and money supply – is so different from other major policy decisions that it should be specially insulated from the electorate. There is no valid analogy, for example, to the independence of the judiciary – which is based on a theory of separation of powers, or checks and balances, ostensibly to limit abuses of power or infringements on civil rights and liberties.
via Answer to the people, not big finance | Mark Weisbrot | Comment is free | guardian.co.uk.
{ 3 comments… read them below or add one }
Central banks should not be controlled by any one group due to the overwhelming urge to take advantage of the power it wields in order to further enrich themselves at the expense of everyone else.
If the central bank was truly independent we would not have an unprecedented 1% interest rates. This is a hugely destructive policy in that it punishes the people who did everything right (savers) and rewards those who were foolish and took on more debt than they should. Central bank independence is just an illusion.
@realconservative – I think the article that I linked to was positing that central banks are controlled by one group – the Finance industry – which *is* enriching itself at the expense of everyone else. The author’s suggestions is that if one group is going to control central banks, it should be “the people,” whose will is expressed through their representatives. Now – I don’t necessarily agree with that, as lord only knows, “the people” don’t always make the most soundly reasoned decisions. But – I’m not sure what a better answer is; so far, Canada seems to be doing OK placing our trust in a balance between the Minister of Finance communicating the will of the people (or party, at least), and the quasi-independent Board of the BoC.
@kevin – you’re right, of course. As one of the fiscally prudent ones, bailouts, etc. really frustrate me too.