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Why do Central Banks have to be independent?


Windowshopper

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I was watching this week's edition of the Week in Politics where the governor of the Irish Central Bank, Patrick Honohan, was being interviewed and a couple of question sprung up in my head:

What does Central Bank Independence actually entail?

What is the rationale behind Central Bank independence?

And if any poster is against Central Bank Independence then why are you against it?

*Also could the mods correct my title it should have been 'why do central banks have to be independent?'
 
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ManUnited

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I was watching this week's edition of the Week in Politics where the governor of the Irish Central Bank, Patrick Honohan, was being interviewed and a couple of question sprung up in my head:

What does Central Bank Independence actually entail?

What is the rationale behind Central Bank independence?

And if any poster is against Central Bank Independence then why are you against it?

*Also could the mods correct my title it should have been 'why do central banks have to be independent?'
Because the alternative is to give control of the money supply back to government. Politicians will print money to buy elections. Many think they have the magic bullet to run the economy.
The other alternative is to have a free banking system and let bankers control the money..imagine that.
 

Windowshopper

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Because the alternative is to give control of the money supply back to government. Politicians will print money to buy elections. Many think they have the magic bullet to run the economy.
The other alternative is to have a free banking system and let bankers control the money..imagine that.
That's what I imagine the answer was. I don't know it seems to be fundamentally quite an undemocratic and the belief of a 'magic bullet' cuts both ways. An independent board of technocrats might led to hubris which would blow up in their face. At least with an independent judiciary an outrageous decision can be reversed by referendum.
 

wilting

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So indebted Governments don't print the currency into oblivion.
 

ManUnited

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That's what I imagine the answer was. I don't know it seems to be fundamentally quite an undemocratic and the belief of a 'magic bullet' cuts both ways. An independent board of technocrats might led to hubris which would blow up in their face. At least with an independent judiciary an outrageous decision can be reversed by referendum.
You are forgetting that a central bank is a creature of statute. They are restricted in what they can do. The legislature can amend the statute or even disband the entire operation. Democracy satisfied?
 

stopdoingstuff

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It must be pointed out though that in many cases, independent central banks are not as independent as we would imagine. If we look at how Shinzo Abe has bullied the Japanese central bank versus the rather cool way in which the Bundesbank and the Swiss central bank conduct(ed) their business, we can see that an awful lot depends on the specific balances of foreces within each country. And as for the Fed....well.......
 

ManUnited

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It must be pointed out though that in many cases, independent central banks are not as independent as we would imagine. If we look at how Shinzo Abe has bullied the Japanese central bank versus the rather cool way in which the Bundesbank and the Swiss central bank conduct(ed) their business, we can see that an awful lot depends on the specific balances of foreces within each country. And as for the Fed....well.......
That's true. I remember an interview with the financial regulator during the boom (Neary?). He was asked about the whole light touch regulation business. He hinted (and this is from memory so I might not have it completely right) that although the CB acts independently it was mindful of the prevailing political ethos of the day.
I say mindful but maybe 'aware' or 'attentive' may be better words. I don't think for one minute that they were doing anything untoward by the way, just human nature I suppose.
 

stopdoingstuff

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That's true. I remember an interview with the financial regulator during the boom (Neary?). He was asked about the whole light touch regulation business. He hinted (and this is from memory so I might not have it completely right) that although the CB acts independently it was mindful of the prevailing political ethos of the day.
I say mindful but maybe 'aware' or 'attentive' may be better words. I don't think for one minute that they were doing anything untoward by the way, just human nature I suppose.
This is true, and we also must remember that in many cases, though not all, there is an institutional bias to see things from the point of view of other banks, and this often leads them to act for the good of the financial sector rather than the economy as a whole. I suppose that would be especially true of the Fed, since it was in essence set up by Morgan, Rockefeller and Warburg. And in certain places like Asia, they functioned more like National Banks who acted to support the states' industrial policy for decades and probably never shrugged it off.
 

ManUnited

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This is true, and we also must remember that in many cases, though not all, there is an institutional bias to see things from the point of view of other banks, and this often leads them to act for the good of the financial sector rather than the economy as a whole. I suppose that would be especially true of the Fed, since it was in essence set up by Morgan, Rockefeller and Warburg. And in certain places like Asia, they functioned more like National Banks who acted to support the states' industrial policy for decades and probably never shrugged it off.
Can't see how you could separate the two. Not in the long term anyway. As for the Fed. The Jekyll Island story has been shown up many times as a conspiracy theory. The bankers did meet, why wouldn't they, but their plan was rejected.
 

stopdoingstuff

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Can't see how you could separate the two. Not in the long term anyway. As for the Fed. The Jekyll Island story has been shown up many times as a conspiracy theory. The bankers did meet, why wouldn't they, but their plan was rejected.
Yeah, that is the trouble- how do you separate their institutional duty to the economy as a whole from what has been ingrained throughout their professional lives. As for the Jekyll Island, there is not much to debunk- the bankers were there ably represented by Benjamin Strong among other, Aldrich was there, they ultimately got their central bank or at least a version of it and it's first NY chairman was...............Benjamin Strong. It is no more a conspiracy than any other lobbying exercise.
 
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ibis

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You are forgetting that a central bank is a creature of statute. They are restricted in what they can do. The legislature can amend the statute or even disband the entire operation. Democracy satisfied?
For everyone except those who believe that election is both necessary and sufficient to make something 'democratically accountable'.
 

Astral Peaks

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"Be"?

...have to be independent? I assume that was your meaning?
 

seanmacc

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But they're not independent. Over 90% of the worlds central banks are under the kosh of Goldman Sachs and the Rothschild dynasty.
 

pippakin

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I was watching this week's edition of the Week in Politics where the governor of the Irish Central Bank, Patrick Honohan, was being interviewed and a couple of question sprung up in my head:

What does Central Bank Independence actually entail?

What is the rationale behind Central Bank independence?

And if any poster is against Central Bank Independence then why are you against it?

*Also could the mods correct my title it should have been 'why do central banks have to be independent?'
Central banks are supposed to be independent because every knows how financially literate and trustworthy bankers are.....I'm not sure that there is such a thing as an independent central bank.
 

ManUnited

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For everyone except those who believe that election is both necessary and sufficient to make something 'democratically accountable'.
That is a very thin definition of accountability ibis, in a representative democracy. Democracy doesn't just mean having a vote on everything or elections. It also requires a commitment to the rule of law. In that sense taking action in the courts against an arm of the state is also democratic accountability.
 

ibis

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That is a very thin definition of accountability ibis, in a representative democracy. Democracy doesn't just mean having a vote on everything or elections. It also requires a commitment to the rule of law. In that sense taking action in the courts against an arm of the state is also democratic accountability.
I entirely agree, but there are some very vocal people who wouldn't. To them, the government is "accountable" because its individual members are elected - the Central Bank is not because its board members are not.
 
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