Bank of England Governor Mark Carney has announced he is staying on until June 2019, to implement the funny-money policies that British voters increasingly doubt. Republican Presidential candidate Donald Trump was criticized for “politicizing†the Fed when he called on Fed Chair Janet Yellen to raise interest rates. Similarly Bank of Japan Governor Haruhiko Kuroda and ECB President Mario Draghi are above criticism, even as their policies lead to disaster. The “independence†of central banks is a modern shibboleth, but far from being a market approach, it derives from the Keynesian Bureaucrat Fallacy, in which all-wise bureaucrats are supposed to govern us better than we can govern ourselves.
The traditional theory behind central bank independence was that politicians could not be trusted not to push for inflationary policies, especially in election years, so that a wise central bank needed to be insulated from them. Thus, the Fed was set up with a complex structure of regional banks, the heads of which would have an almost equal voice in setting interest rates with Fed Governors, who would be Presidential appointees, but with terms as long as 14 years, far longer than the political lifespan of Presidents. Similarly, the Bank of England was given formal independence by Gordon Brown, when he became Chancellor of the Exchequer in 1997. The European Central Bank, like most EU institutions, was almost entirely free from democratic control, with the independence of the Deutsche Bundesbank as its model. Finally, the Bank of Japan became independent with the 1997 revision of the Bank of Japan Act.
It should be noted that with the exception of the Fed, whose independence was established by the Fed/Treasury accord of 1951, central bank independence is a relatively new idea, dating only to the late 1990s. It was basically a reaction to the inflation of the late 1970s, which was felt to have been caused by excessively political monetary policies in the U.S. and elsewhere.
The problem with central banks’ independence is that there is no incentive structure for central bankers to make good decisions, and therefore they are subject to all the problems outlined in James M. Buchanan’s public choice theory. With nobody controlling them, and neither an electorate nor a market to which they are responsible, independent central bankers are free to make decisions based on the latest fashionable academic theories, or indeed, in a polity only slightly more degenerate than our own, based on the wishes of who bribes them most.
