Wow, I just read a defense of the independence of central banks by Ben "BB QE" Bernanke. I will hit the highlights, and explain why I think Bernanke is such a fraud, though I agree with his central premise (and disagree with well-meaning libertarians like Ron Paul), that the Fed Reserve should remain independent from policymakers in Congress.
This exercise in hypocrisy would be hilarious if it weren't such a serious issue. What's sad is that I generally agree with all of the points Bernanke makes, especially since his arguments seem systematically designed to discredit his own actions as Chairman of the Fed. Here's the link if you want to read it yourself.
http://www.realclearpolitics.com/articles/2010/05/25/central_bank_independence_transparency_and_accountability_105733.html
The first argument Mr. QE proposes is absolutely true. "To achieve both price stability and maximum sustainable employment, monetary policymakers must attempt to guide the economy over time toward a growth rate consistent with the expansion in its underlying productive capacity. Because monetary policy works with lags that can be substantial, achieving this objective requires that monetary policymakers take a longer-term perspective [than politicians] when making their decisions." I agree. We know that politicians only think about short-term considerations like getting elected, and couldn't care less about the mess that their successors inherit. There is no doubt in my mind that if Legislators or even Executives were given direct control over the Central Bank, monetary policy would become a direct tool in the re-election of politicians. Central Banks simply must have a longer time horizon to remain effective. As Bernanke says, 'political interference...lead[s] to both a less stable economy and higher inflation.'
Of course, Quantitative Easing also leads to both a less stable economy and higher inflation. QE is the process by which the central bank (in this case the Fed) buys government bonds in secondary markets from private banks to increase the bank's reserve ratio...the amount of money the bank has 'in reserve.' This allows the banks to lend much more money into the economy. For example, if law requires that banks keep 10% of the value of loans in reserve, then for every $10,000 of debt purchased by the Fed, the bank can loan another $100,000 to businesses, or (as usually happens in times of high uncertainty) buy more government debt. This drives down the interest rate that the Federal Government pays on its debt, while driving up the amount of money available in the marketplace for loans. Theoretically, this is an emergency measure used only when deflation is a real threat, since monetizing the debt is quite literally creating money from air.
The practical impacts of QE are many, but here are some of the most interesting. First, QE allows the government to continuing borrowing money indefinitely with little risk of paying more in interest to service its debt. In fact, at the present time, the interest rate on U.S. treasuries is at the lowest point in years at precisely the same moment that the % of debt to GDP ratios have skyrocketed far beyond historical norms. Why? QE.
Second, QE is directly and intentionally inflationary. Inflation has thousands of impacts, including serving as a hidden tax on unsophisticated savers, increasing competitiveness of exporters (a stated Obama policy goal), and perhaps most importantly decreasing the real value of the massive government debt and deficit which increase every year no matter what political party is in charge.
Interestingly, Bernanke states that "the costs of undue government influence on the central bank's quantitative easing decisions could be especially large, since such influence might be tantamount to giving the government the ability to demand the monetization of its debt, an outcome that should be avoided at all costs."
Hah! So true...and yet so frightening. Lets take a moment to consider a few aspects of the timing of Bernanke's first and second rounds of QE.
QE1: Just after Barack Obama was elected in Nov 2008, BB announced the first round of QE which he then amped up in Dec and again in March 2009. Shortly afterward, Obama announced that he was renominating the 'politically independent' BB for another 4 year term starting Feb 1, 2010. Of course we know that for a government, especially a liberal government with ambitions as large as Obama's absolutely must have a low interest rate on debt, otherwise deficit hawks will begin to howl and independent voters just might listen.
QE2: Just after the Nov 2010 elections (sound familiar?), BB announces that he is set to embark on yet another round of QE. Why might he do that you ask? After all, it will be the president elected in 2012 that will decide whether to keep him in his position of power. Well, he just might be worried about those short term political implications that he argues (and I agree) should not be used to make monetary policy. Consider this: If the economy and employment make a recovery (even short term spike that is ultimately damaging in the long term), then Obama (who knows that there will be no second stimulus) will likely...secretly...credit BBQE for his contribution to Obama's re-election, thus ensuring that BB will be reappointed. Even if Obama is not re-elected, the savvy politician who replaces him will know that BBQE has his back, especially since BB might well repeat his antics after the election in 2012 to help aid the incoming president in the same way he aided Obama.
If my allegations are true--and there's no guarantee that they are, then BB QE is a total fraud and knowing liar. If this is central bank independence, then I'd hate to see what integration looks like.
George Will had a very interesting point to add, which I'm embarrassed I didn't think of myself.
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/17/AR2010111705316.html?hpid=opinionsbox1
This article discusses the Fed's dual mandate of price stability and full employment which was first granted in 1977. Not only does the goal of full employment conflict with the goal of price stability, but mandating the Fed to seek full employment is an explicit and intentional politicization of a supposedly apolitical independent force. This adds credibility to my fears that BB QE is both aware of his political clout and exercising it in the pursuit of his power. After all, if full employment is every politician's goal (and right now it ought to be), then BBQE's goals are directly aligned with those of the politicians. The full employment mandate for the Fed dramatically increases the likelihood that the FED is not independent, but is actually another arm of government, working for the political goals of its Board of Directors.
See why I'm so worried about all those problems that BB talked about if the Central Bank isn't independent?
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