Re: ECB and world-wide recession

["William F. Hummel" <wfhummel@xxxxxxxxxxxx>]

James,

My general views on this subject were presented in my response to
Henry Liu.  But I have a number of comments to make about your
message.

>William,
>
>The point is that "independent" central bankers have shown no
>expertise that justifies their status or their quite extraordinary
>power.

This depends upon what you consider to be expertise.  I would say
the central bankers of the US are a pretty competent group
compared to those who manage fiscal affairs.  This may not be as
true in parliamentary systems, but I suspect it is generally
true.

>There are obvious disadvantages in slicing the responsibility for
>economic policy/management in two. The government goes off in one
>direction on fiscal policy, the CB in another direction on interest
>rate/monetary policy.

At least in the US, fiscal policy is a muddle of conflicting
political and special interests.  It is an oversimplification to
talk about a coherent fiscal policy.  It hasn't existed for many
years.  In recent years, monetary policy has become the principal
governmental policy instrument by default.

>Most central banks are mandated to maintain the value of the currency
>- usually in terms of a limit to domestic inflation.
>They have no responsibility for the much more important social goal of
>full employment or most other things.

It's true that many central banks, including the RBA, focus on an
inflation target.  Indeed I believe the inflation target is the
only official mandate of the ECB.  It is not true that central
banks have no responsibility for the social goal of full
employment (whatever that means).  The Federal Reserve Act writes
that into law.  However, I don't believe it is within the power
of the Fed to achieve full employment.  The last few percent will
never make it for lack of adequate skills.  It is up to the
government to find a solution for them, and would likely involve
direct employment by the government.

>The record of central bankers does not disclose many miracle-workers
>or even people of average competence. Even the Bundesbank - which is
>usually set up as an example - has an extremely patchy record. The US
>Fed has succeeded in doing great damage to United States interests as
>well as to significant sectors of the American society.

I agree that the Fed has made serious errors.  Many of those were
for lack of understanding of the transmission of monetary policy
to the economy.  Others were less forgivable.  However I do not
agree that the Feds past errors means we should change the role
of the Fed, at least until its clear what the alternative is.

>Most governments have made their central banks "independent," not
>because they have, after dedicated research and reflection, decided
>that is best for their economy and society, but mainly because, in
>recent years, it has become the thing to do.
>It is conventional wisdom - it is politically correct to believe -
>that central bankers are more expert than members of governments and
>public servants. Central bankers are believed to be free of "politics"
>- whatever that means and begging the question of course whether, in a
>democracy, those who determine such crucial things as interest rates
>should not be influenced by "politics" if that means a sound and
>faithful attempt to ascertain and meet the interests and aspirations
>of the society.
>Do I need to go on?

Yes, you need to go on.  You have not explained precisely who
should set monetary policy in your view.  Please name the office
or individual that is charged with that responsibility, how he is
appointed (or elected), and describe the modus operandi for
setting policy.  Then we can start examining the practicability
and implications instead of arm waving.

>But behind all this is another very important factor and one to which
>we should give very deep consideration.
>That is that, in the past thirty years, virtually all governments have
>shown themselves unable to cope with economic issues. It has been a
>most unstable period, with one crisis following another and the
>efforts of governments to achieve stability and growth succeeding or
>not mostly by chance.

It was about 30 years ago that the international monetary system
changed dramatically.

>It can be argued that governments have always had this incapacity to
>cope and that is largely true.
>However, the complexity of the economic environment and the impact of
>economic policy decisions both domestically and externally have never
>been greater.
>Under these circumstances, governments have been increasingly
>unwilling to face up to their responsibility to govern. They don't
>know what to do and they have seen that, often, when they do what
>conventional wisdom - as handed out often by their "expert" advisers -
>required them to do, it results in something quite different from what
>they intended.
>So, rather than accept the responsibilities of office and risk
>electoral defeat, they grasp the easy option of appointing an
>independent central bank to be responsible for what has increasingly
>become, in a so-called "free-market" economy, the central feature of
>financial and economic management.
>They have found, not a solution, but someone to blame and to do so in
>keeping with the fashion of the time.
>
I find this a curious argument in support of the proposal to
transfer control of monetary policy (interest rate) from the
central bank to the political branch.  You have accurately
outlined the sad state of affairs in the latter.

William F Hummel