Mysteries Of The Independent Central Bank

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Feb. 21 2012 5:29 PM

Mysteries Of The Independent Central Bank

The price of independence is limited power. Central banks that only try to control inflation, and only using one tool, such as purchases and sales of Treasury debt, can be walled off from the political process. As a country, we can decide that the price level will not be used for political purposes and assign its maintenance to technocrats.

Call this the foundational myth of modern central banking. Like all good myths, it doesn't withstand even the tiniest amount of scrutiny. Consider Alan Greenspan, the most celebrated central banker of our era. To serve as a technocrat he must possess the techne, the knowledge of the discipline of economics that makes him credible as a High Priest of the economic order. And yet he is a man of flesh and blood. He cannot serenly segment his views of the monetary policy aspect of macroeconomics from his views of the rest. And he has a duty—a solumn duty—in his role as technocrat to do what's right for the county. So in 2000 Greenspan tightens money, George W Bush wins the election, Greenspan explains that the budget surplus runs the risk of plunging the country into socialism and endorses the Bush tax cuts, in 2004 he maintains loose money, Bush wins again, and Bush sets about to try to privatize Social Security. Is this a violation of Greenspan's technocratic duty, or its performance? The decision in favor of tight money during the 2000 election cycle was defensible, as was the decision in favor of loose money during the 2004 cycle. The preferences appear to be inconsistent, yes, but underlying them is a deeper consistency—a belief that private savings ought to be the foundation of the retirement system and that it would be a great risk for the country to create a "lockbox"-cum-Sovereign Wealth Fund to prefund it as a collective system.

It would be scandalous to admit that such considerations entered into the mind of the Maestro, but it would be equally absurd for him to forget about them. We're talking about a grown man, knowledgeable in the ways of Washington and in economic policy debates. A technocrat, not a moron or a naïf. So what else is supposed to happen? Was Ben Bernanke sad that the 2010 midterms brought a sudden stop to talk of cap and trade and pro-union revision of labor law? Is Bernanke more favorably disposed to Obama's re-election now that all the GOP contenders have criticized him and promised to fire him? If he takes his obligation as a technocrat seriously, shouldn't he consider that at this point keeping Obama in office is necessary to defend the perogatives of the Fed?

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.