Friday, September 19, 2008

Central Bank Independence

Some people seem to think that Bernanke and his band of Merry Economists have overstepped their bounds in their bridge loan to AIG.

Well, they certainly might have...but one wonders why Congressmen whine about the lack of oversight of the Fed when they themselves aren't subject to too much "oversight." I mean, they get a heavy hand in drawing their own districts, right?

Anyways, people seem to increasingly demand the reigning of the Federal Reserve Bank. Problem being that this isn't entirely logical. While the Fed has expanded its powers somewhat, central bank independence is an important pillar of any modern economy. It ensures that the financial system isn't subject to the whims of politics, and instead is a rational process based on the needs of the nation.

It is also important to ensure that policy is prompt. Since the Federal Reserve is subject to less "oversight" it can respond to crises faster. While cutting interest rates in order to stimulate demand is still slow, and only a bit faster than government spending by a bit, the Fed has demonstrated remarakble speed and innovation in moving to avert disaster. For instance, quickly extending a bridge loan to AIG, opening the discount window to Investment Banks, etc etc.

The alternative is to rely on government. Government, at the best of times, is relatively slow-moving, and when it is fast moving it is generally in response to national security issues (like the PATRIOT Act). At the worst of times, IE, right before an election, IE, right now, it is ponderous and incapable of the nimble movement required to navigage modern finance.

Hence, central bank independence=good

No comments: