by Ben Cohen
Megan McArdle (whose blog I've recently become a fan of) has the following to say on central Bank independence:
In a democracy, there will be a strong tendency for monetary
policy to favor debtors, because there generally more debtors than
creditors. This is particularly true of America, with its lavish
In the long run, however, strongly inflationary
monetary policy makes everyone worse off; it impedes capital formation,
According to McArdle, sound monetary policy should ignore populist interests and work in favor of an elitist system (ie, bank independence) that encourages a debt culture:
There is something magical about bank independence. It lets Congress
cut against its basically populist political interests. You may think
that makes it too bank-friendly. But it also means we don't have
While I think Megan runs a great blog over at the Atlantic, she seems to be suffering from severe amnesia, and a rote reaction born out of an irrelevant paradigm. Firstly, the notion that you go against populist interests because people are too stupid to understand what is good for them is offensive, and plainly wrong. We've allowed the banks to shackle us with debt for 30 years and it has led to the biggest economic catastrophe in 80 years. Had congress enacted 'populist' policy, (ie. legislation that protected people from excessive debt and bankruptcy), there's a good chance the economy wouldn't have gone down the toilet. Creditor crafted monetary policy will always result in predatory lending practices, excessive risk and highly suspect speculation. For proof of this, just look at what happened.
Creditors will always encourage a system of leverage regardless of the outcome. If the venture fails, the debtor still has to repay the sum. It's basically a win - win situation for those with capitol. Debt can create wealth, and as we have seen, enormous amounts of it. But it usually benefits a very small sector of the population and it also creates massive inequality that keeps the majority of people poor and burdened with massive debt. While their quality of life may be artificially higher, it's really an illusion given they don't own the cars they drive or the houses they live in. And if the debt is called in, the majority of people can't pay it, particularly if they lose their job.
The truth is, bank crafted monetary policy encourages debt that people can't pay, and at some point, the reality sets in.
While Banks are certainly good at looking after their own interests, they haven't done a great job of looking after everyone elses. Why Megan would want to give them more independence is beyond me. Perhaps we should give populism a try. It couldn't get any worse.