How Central Bank Independence Has Become A Political Moral Hazard

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

Flattr this

The 1951 Treasury-Federal Reserve Accord had formally established central bank independence in the United States to prevent political meddling by either the Congress or the Executive Branch in the setting of interest rates and in bank supervision.

Congresses and presidents have learned to respect the independence of the Federal Reserve by 1983 when Paul Volcker ended his first term as Chairman of the Fed. That tradition continued until the end of the George H.W Bush presidency in 1993. Fed’s accountability occurred only through formal public pronouncements and Congressional testimonies by the Central Bank’s governors and Chairmen.

The Clinton presidency and the Greenspan Fed after 1993, however, began a new approach to wielding the Fed’s independence as a political tool: the Fed often supported the White House in exchange for presidential appointments of its Board members, effectively becoming an “independent” economic voice of the White House. Alan Greenspan was reappointed 3 times since 1993 and Ben Bernanke has been reappointed once, unprecedentedly contentiously in the US Senate, by Obama.

Per the law, presidents do not tell the Fed what to do but the Fed has become habituated to toeing the White House line wearing the mask of independence. Greenspan supported Clinton and Rubin and the Bush tax cuts. Bernanke has put his weight behind repeatedly raising the debt ceiling while popularizing the fiscal cliff for the purpose of raising taxes on the wealthy with no talk of either comprehensive tax reform or government reform.

Fed’s independence is not about political correctness or new found transparency in front of the financial press. It is about independent thinking outside the Washington echo chamber. That had ended in 1987 with Paul Volcker.

Advertisements

About Chandrashekar (Chandra) Tamirisa

http://www.thecommonera.com/Common_Era/Me.html
This entry was posted in Economics, Monetary Policy, Transformations LLC and tagged . Bookmark the permalink.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s