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Why Do We Applaud The Idea Of An Independent Central Bank?

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The notion that the nations central bank should be independent from government control is one of those ideas that we all seem to accept without question- but should we?

After all what exactly is it that our CB is independent from? Well- essentially- it's independent of democratic control- it's not answerable to the people we vote for.

The rationale seems to go like this- because our elected leaders cannot be trusted to make responsible decisions regarding interest rates and QE ect we must hand the power to make these decisions over to ex Goldman Sachs employees like Carney- or to aspiring Goldman's employees whose future job prospects might well depend on how 'bank friendly' their choices were at the CB.

Suppose we applied this logic to other essential national institutions- for example the Military. Should we not have an independent army, navy and airforce? Would we be happy to have our armed forces controlled by private individuals- perhaps even from overseas- who would decide if and when those forces should be deployed?

Most people would regard this as a crazy idea- yet most people seem happy to accept that out nations Central Bank is controlled by an individual who is not even a UK citizen.

If we do not trust our elected officials enough to control the Nations money why do we trust them with nuclear weapons?

Odd when you think about it.

And what if Carney feels more loyalty to this friends in the banking sector than to the citizens of a foreign country? Might his decisions be just as suspect as anyone else's?

We have printed billions to prop up the asset values of the wealthy- while the living standards of the rest of us have declined- so who-exactly- does the 'independent' Bank of England work for - us or them?

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The notion that the nations central bank should be independent from government control is one of those ideas that we all seem to accept without question- but should we?

No, what most people accept without question is the idea that a country should have a central bank.

Once you have one, arguing about who should run it is about as effective as pissing on a supernova.

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They're not independent.

They're operationally independent, which is different.

They have a mandate given to them by government (which in the case of the UK wasn't democratically elected by anybody as it happens) with clear parameters.

Their officers are appointed and vetted by govt. and they are accountable to govt. for their decisions.

Carney didn't magic himself into the job - Osborne put him there, Osborne has given him an inflation target, he has to write a letter explaining why he misses it each month, and seek Osborne's permission to continue missing it each month. Osborne writes back to agree to him continuing to miss it each month. The Treasury Select Committee grill Carney periodically as to why he misses it each month, and then write a report explaining to parliament why he misses it each month.

Or stuff to that effect............

An alternative might be Osborne printing his own money, but since he's a complete moron that probably wouldn't end especially well.

Edited by R K

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The notion that the nations central bank should be independent from government control is one of those ideas that we all seem to accept without question- but should we?

This was an undergraduate question from the mid 90s. Essentially the opinion at the time was that it was desirable but unlikely to happen.

Essentially it comes down to credibility and inflation expectations, it also helps to have an understanding of the long run phillips curve.

Basically, if you're a politician, you want to convince the public that inflation will be x% and then cheat a little bit. The problem is that the public expect you to cheat so expect inflation to be x+y%, which then leads to a ratchet mechanism, because if the public expect x+y% you'll go for x+y+z% and soforth.

The idea is that if you devolve the decision making process to an independent body then when they say that inflation will be x% then the public will believe that and as a consequence inflation will be x%

P.S. Very p***ed. Happy x-mas.

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They have a mandate given to them by government (which in the case of the UK wasn't democratically elected by anybody as it happens) with clear parameters.

Yeah... no.

The current government resulted from a democratic election.

The problem with any parliamentary system is that no government is ever more elected than another. There's 650 individual races to be a representative (importantly, not a delegate), after which they all get together and decide who should run the place. That happened in 2010, 2005, 2001, 1997, 1992, etc etc.

If you want to elect the government and the legislature separately, that's a different kettle of fish, and coherent conversation. But the idea that the current government is less democratically elected than the previous one is one of the most profoundly insidious and dangerous memes ever allowed out by the press.

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When the BoE was given the role, informally in the early 90s and formally in 1997, there was a general belief, an understanding, that the "independent" BoE would be acting in the best interests of the UK along with those handing over the responsibility - ahem. Look where the UK is now.

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No, what most people accept without question is the idea that a country should have a central bank.

Once you have one, arguing about who should run it is about as effective as pissing on a supernova.

+1

And inflation. And "growth" - the need for that.

Inflation - well, we just all accept that.

Growth - now and again someone questions why we have to have it and what "it" really is, but doesn't necessarily link it back to inflation, and then link it back further and question more..

Good points made in this thread.

I don't really see why we have to have a central bank either.

Underlying this:

In theory, I don't see why we need a debt based monetary system. Except that money has to have some value assigned to it. There has to be a "cost" to creating new money because if there were none, the government of the day would just print it to infinity rendering it worthless every single time, so the fiat currency would only last for five years or so and have to be replaced with each new Parliament.

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Most people would regard this as a crazy idea- yet most people seem happy to accept that out nations Central Bank is controlled by an individual who is not even a UK citizen.

he is,however, a citizen of the commonwealth, and that retains the queen as head of state, so it shouldn't be that big a deal.

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+1

In theory, I don't see why we need a debt based monetary system. Except that money has to have some value assigned to it. There has to be a "cost" to creating new money because if there were none, the government of the day would just print it to infinity rendering it worthless every single time, so the fiat currency would only last for five years or so and have to be replaced with each new Parliament.

you need a debt-based money system to show the rest of the world what naughty boys and girls you have been for being so extravagant,and to make an example of you being punished.(and for the opposition to confiscate your stuff by stealth)

...also for your punishment to be an incentive to the rest of the world to join in their new super centrally planned "ledger" system where all the goods are collectivised and everybody gets their own permanent electronic ration card.

(of course it won't be long until those ration cards get defrauded/stolen etc so everybody will be getting individual serial numbers tattooed on them just like hitler did to the jews in nazi germany)

yes, the new system of government being designed(to replace us) is a kind of hell-spawn hybrid of marx and engels.initially brought to you with a nice smiley face and oh-so-soothing voice.

Edited by oracle

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Independent?

The larger 'half' of the MPC is appointed by the chancellor.

Their inflation target is set by the treasury.

The inflation statistics that are used to hit this are fabricated by central government.

The only reason people think the BoE is 'independent' is because the media in this country never does its job of investigating the true state of things.

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you need a debt-based money system to show the rest of the world what naughty boys and girls you have been for being so extravagant,and to make an example of you being punished.(and for the opposition to confiscate your stuff by stealth)

...also for your punishment to be an incentive to the rest of the world to join in their new super centrally planned "ledger" system where all the goods are collectivised and everybody gets their own permanent electronic ration card.

(of course it won't be long until those ration cards get defrauded/stolen etc so everybody will be getting individual serial numbers tattooed on them just like hitler did to the jews in nazi germany)

yes, the new system of government being designed(to replace us) is a kind of hell-spawn hybrid of marx and engels.initially brought to you with a nice smiley face and oh-so-soothing voice.

we have a debt based system whether or not there is a central bank monetising assets, or a Government issuing its own cash...Its called the money multiplier, otherwise known as credit.

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Two quotes from Bad Samaritans by Ha-Joon Chang

Firstly, setting out the conventional wisdom:

Neo-liberal economists argue that two things are essential in achieving low-inflation. First there should be monetary discipline - the central bank, which controls the money supply, should be made to pursue price stability single-mindedly...[o]nce we ask the central bank to consider other things, like growth and unemployment, the argument goes, the political pressure would be unbearable...[t]he best way to stop this from happening is to 'protect' the central bank from politicians... by making it 'politically independent'.

Then pointing out the political choice hidden behind the conventional wisdom.

Lower inflation may mean that what the workers have already earned is better protected, but the policies that are needed to generate this outcome may reduce what they can earn in the future...t is only pensioners and others (including, significantly, the financial industry) whose incomes derive from financial assets with fixed returns for who lower inflation is a pure blessing.

For me, the legitimacy of the central bank is less of an issue now than it was pre-2008. Pre-2008 there were grounds for politically motivated intervention into the ability of the private banks and non-bank lenders to allocate credit to housing. However, the worst lending practices of the boom do seem to have been an artefact of the existence of huge class of 'investors' willing to buy any old dogshit RMBS provided that a credit agency had rubber stamped it AAA, and those horrific lending practices do seem to have largely disappeared following the revelation that calling dogshit gold doesn't make it gold.

Now IMO the Bank of England are more worried about deflation than they are about inflation. Given the prevailing orthodoxy about the Great Depression, the Bank of England would be doing exactly what it is doing now (providing liquidity) regardless of whether is was notionally independent or not. As to whether or not it should be, that's a different matter, and as to whether or not it should also be far more conspicuously and aggressively fixing the too big to fail problem and dismantling Fred Goodwin's monstrous zombie legacy, that's also a different matter.

Regardless, all this country knows is borrowing money against houses and spending it on tat, so that's all we'll see till someone else stops us.

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Two quotes from Bad Samaritans by Ha-Joon Chang

Firstly, setting out the conventional wisdom:

Then pointing out the political choice hidden behind the conventional wisdom.

For me, the legitimacy of the central bank is less of an issue now than it was pre-2008. Pre-2008 there were grounds for politically motivated intervention into the ability of the private banks and non-bank lenders to allocate credit to housing. However, the worst lending practices of the boom do seem to have been an artefact of the existence of huge class of 'investors' willing to buy any old dogshit RMBS provided that a credit agency had rubber stamped it AAA, and those horrific lending practices do seem to have largely disappeared following the revelation that calling dogshit gold doesn't make it gold.

Now IMO the Bank of England are more worried about deflation than they are about inflation. Given the prevailing orthodoxy about the Great Depression, the Bank of England would be doing exactly what it is doing now (providing liquidity) regardless of whether is was notionally independent or not. As to whether or not it should be, that's a different matter, and as to whether or not it should also be far more conspicuously and aggressively fixing the too big to fail problem and dismantling Fred Goodwin's monstrous zombie legacy, that's also a different matter.

Regardless, all this country knows is borrowing money against houses and spending it on tat, so that's all we'll see till someone else stops us.

Greenspan was the principal villain. He was appointed by Reagan to undermine the Volcker reforms and the original Basel Accord and did so at every opportunity. His efforts to restore capital markets to the supposed pre-regulatory halcyon that existed prior to 1930 ended in exactly the same fashion: capitalism's abject failure.

Edited by zugzwang

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Greenspan was the principal villain. He was appointed by Reagan to undermine the Volcker reforms and the original Basel Accord and did so at every opportunity. His efforts to restore capital markets to the supposed pre-welfare halcyon that existed prior to 1930 ended in exactly the same fashion: capitalism's abject failure.

I still worry the central banks are run for the benefit of the banks and not for the economy.

Effectively the right to create credit has been outsourced.

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