Clive Crook has written a column at Bloomberg, entitled “You Pick: a Strong Recovery or an Accountable Fed?” Right off the bat, he gets my attention with another false choice offered by another mainstream columnist writing another column in an attempt to protect central banking by keeping the boundaries of the discussion within the limits set by the masters. I can’t even get to the article without first struggling through the illogic of the headline:
- Why should I, or anyone, have the power to make such a “pick”?
- Why are these two possibilities represented as mutually exclusive?
- Is it not possible, in our current economic framework, that we get neither?
- Are there no other choices?
Let’s see what Clive has to say (forgive my use of his first name, but to refer to him as “Crook” throughout my comments doesn’t seem proper).
At last week’s conference of central bankers in Jackson Hole, Wyoming, the main topic of conversation was off the program.
In the margins of the meeting, many of the bankers talked about the threat to their independence posed by meddling politicians.
This concern is understandable. When a small handful of individuals has virtually unlimited power and ability to manipulate markets, it cannot be pleasurable to consider that at least some people are considering to take a peek behind the curtain. For someone who enjoys playing god over the lives of billions of people, the job of a central banker is pretty high up on the list for offering a platform – well above any elected politician in any office, for example.
Whether or how to impose democratic accountability on central banking has become the most important question in political economy, not just in the U.S. but also in Europe and around the world.
Central banking was established in a manner to circumvent democratic accountability – on two levels.
First, it was meant to circumvent the political dimension of democratic accountability. The Federal Reserve was hatched in secret, and the legislation passed in the dark of night during the year end. Only recently – after almost 100 years in operation – has there been even the slightest peak into its most basic transactions. The actions must be kept secret, because they cannot stand the accountability that comes with light. The Fed is the backbone of a system designed to steal wealth from the productive class. How on earth can such an institution be left open to democratic accountability?
But second, and on a more important level, central banking was designed to circumvent the accountability imposed by the marketplace – the most democratic institution ever created by man. Money and credit first developed in the market – there was no central banker interjecting himself in the first trade facilitated by an intermediate means. Various forms of “money” evolved, based on acceptance in the local region. These were tried and tested, further refined via broader patterns of trade. Credit evolved in a like manner, with forms developed in the market based on methods proven over time to work efficiently.
The market, that most democratic of institutions, would ensure that, over time, the most efficacious and efficient means of conducting and financing trade were developed. Accountability in money and credit was no different than the accountability expected of any trade in any good. Accountability of the banker and financier was no different than the accountability expected of the blacksmith or cobbler.
Let’s make a deal. Do what you said. This is the market, and the market derived money and credit necessary for its ends. Accountability came in the same manner it did for all goods, and for the same reason. If you did not deliver the quality and quantity of product expected and paid for, you would pay the reputational and eventually the financial consequences.
Central banking was designed to strip away the market accountability, through the monopoly granted by the politicians – those same politicians that are to be avoided at all costs by the central bankers meeting in Wyoming.
Unfortunately, the answer that’s emerging is unfit for public consumption. We can have proper checks and balances or good central banking, it seems, but not both.
First, I must strip away one word from this choice being offered by Clive. There is no such thing as “good” central banking. Any institution granted monopoly privilege by the state is a “bad” institution. It is central economic planning. It cannot be “good” in any sense of the word. When the market is stripped of its ability to discipline and hold an actor accountable, there is no “good” that can come forth. When competition is not only discouraged, but disallowed, there is no reason to expect “good” to come forward from the protected institution.
This is most true when it comes to the issue of money and credit – always and everywhere one side of every transaction, sometimes on both. Utilizing the services of this monopoly cannot be avoided in any way by any actor in the market. Even a self-sustaining farmer will at some point be required to pay some form of tax. The tax cannot be paid in crop. Therefore, even this farmer must find a way to secure this money-product borne from monopoly.
Now, let is look at Clive’s choice once again, without the offending word:
Unfortunately, the answer that’s emerging is unfit for public consumption. We can have proper checks and balances or
good central banking, it seems, but not both.
Modified this way, the choice offered is quite correct. We can have central banking or we can have checks and balances – not the checks and balances of the politicians, but the checks and balances of the market.
The market, left free, is a most wonderful invention. Prices, freely arrived at, communicate to all participants the views of the most valued uses of the various goods and services available. Profit and loss ensures that the goods and services are utilized in the most efficient manners available. There is no better system possible to best meet the needs of the consumer, and to meet those needs in the most efficient manners available.
Let’s return to Clive:
The idea that central banking could be kept above politics was never really plausible, but for a long time central bankers could get away with pretending otherwise.
It is true; this idea of political independence was never plausible. But it is not true that central bankers pretended otherwise. One of the more famous examples is that of Arthur Burns, Fed Chairman during Nixon’s presidency:
…a year into his term, with the economy faltering, Nixon tapped Burns to replace William McChesney Martin Jr., the Fed chief who had dashed his hopes in 1960. According to Burns biographer Wyatt Wells, Nixon issued his appointee some blunt instructions: “You see to it,” Nixon said. “No recession.”
Nixon sure didn’t act as if Burns was independent.
…despite his instructions to Burns, in 1970 the U.S. suffered a recession, triggering a rise in unemployment to 6 percent, its highest mark in a decade.
Nixon was furious with Burns.
Despite the galloping inflation, Nixon pressured Burns to loosen monetary policy. White House aides, violating the central bank’s supposed independence, inundated the Fed with memos on the need to lower rates. “The pressure that Nixon exerted was unbelievable,” says Joseph Burns, the late Fed chief’s son. Volcker agrees that it got “very rough.”
Well, it is only pressure. Central bankers, men with the wisdom to centrally plan the money and credit for complex, multi-trillion dollar economies, are certainly strong enough to withstand political pressure. Men of steel, I would imagine.
As the economy shifted into a tepid expansion in ’71, Burns allowed the money supply to expand at an annual rate of 8 percent in the first quarter, 10 percent in the next. This was wildly expansionary. Allan Meltzer, a Fed historian, says Burns’s policy was partly attributable to honest miscalculations. (Determining the rate of money supply growth is fiendishly difficult.)
Not fiendishly difficult; impossible. No single man or committee of men can accomplish this calculation.
But Meltzer says Burns was also influenced by Nixon’s bullying. The President alternately flattered Burns and excluded him, and Burns careened between feisty shows of independence and toadying displays of loyalty. In his diary, Burns assures the President that “his friendship was one of the three that has counted most in my life”; a few months later he is recoiling at Nixon’s “cruelty” and, still later, at his anti-Semitic outbursts.
Can it be that central bankers are human beings, subject to manipulation, affected by criticism, concerned about being accepted?
Late in 1971, [Nixon] wrote to the Fed chief, “You have given me absolute assurance that money supply growth will be adequate to maintain growth.” Burns scrawled in the margin, “Never gave him absolute assurance. What nonsense!” But Burns, intentionally or not, delivered on Nixon’s demand for an expansionary monetary policy.
Apparently, central bankers can be pressured politically. So much for the option of political independence. Central banks are held accountable – they are held accountable by strong-arm politicians and bankers in back-room deals that cannot stand the light of day. Accountable not to market signals but to political whims. Clive, however, isn’t the one to explain this to us.
Clive does stumble upon some truth in his piece:
An independent central bank can promise to keep inflation low more credibly than a bank directed by a finance ministry -- i.e., by politicians tempted to pump up the economy for short- run electoral purposes.
On a scale from 1 to 100 (with 100 being their word is good as gold), central banks’ credibility when it comes to promises of keeping inflation low I would rate as a 1. If the politicians were in charge – the notion of greenbackers – I would rate as a 0. A supporter of central banks might take my comments and suggest that I believe a central bank can do an infinitely better job of controlling inflation than can the politicians if the latter were in charge of money and credit. While mathematically true, I would suggest a different interpretation.
The rest of Clive’s piece offers praise for even more active central banking, and suggests the mathematically (let alone politically) impossible for solutions:
I’m for central-bank activism.
This comes through loud and clear.
Under today’s conditions, with short-term interest rates at zero, countercyclical fiscal policy has to be granted a bigger role than usual.
“Countercyclical fiscal policy” means deficit spending. I think Clive hasn’t checked the figures lately.
This role has two equally important dimensions, as Fed chief Ben S. Bernanke keeps saying, albeit in prudently elliptical terms. Budgetary stimulus should be maintained or increased in the short term, and public debt should be contained and reduced (under the terms of a plan announced right now) in the medium term.
This is the mathematically (and politically) unsolvable problem, but one that allows the politicians a free pass – increase deficits today, but show how you will decrease the debt long term. This is such a naïve statement, yet it is made regularly by many of the wizards – including Bernanke himself. Without expansion, I offer a few faulty beliefs behind Clive’s (and Ben’s) desires:
- Government spending does not aid growth; it only consumes resources inefficiently.
- Politicians only live in the short term.
- Any “terms of a plan announced right now” won’t be worth the paper it’s written on, and in any case won’t be binding on any politician in the future.
- The only effective “terms of a plan” that would be credible will have to address military adventurism, Social Security, and Medicare. There is no politician willing to announce this plan.
Clive ends where he began:
You can have textbook checks and balances, with all political actors held accountable to voters and independent agencies held to a narrow technical mandate. Or you can have an economy on the path to recovery. Reluctantly, I’ll take the latter.
An independent central bank (an entity that has not existed) will not be the source of a path to recovery. Clive does not offer the proper choice. We can have market-derived checks and balances on money and credit, or we can continue with booms and busts and banking designed to enrich the politically connected at the expense of the productive.
There is your choice. Joyously, I’ll take the former.