Bankers running amok

Economist Dean Baker points to the world-befouling relationship between a modern and minimalist democracy and a modern central banking system:

The worst part of this story is that these fundamental decisions about economic policy are made by a small, secretive clique operating largely outside of the public’s purview. Central bank decisions on interest rates are likely to have far more impact on jobs and growth than any of the policies that are debated endlessly be [sic] elected parliaments. Yet, these decisions are made largely without democratic input.

In fairness, politicians bear much of the blame for this situation. They established institutional structures that largely place central banks beyond democratic control. There is probably no bank that is as insulated from the democratic process as the ECB, in large part because of its multinational structure, but all the central banks in wealthy countries now enjoy an extraordinary degree of independence from elected governments. In many countries they are even more independent than the judicial system.

Even worse, the politicians have actually mandated many central banks, like the ECB, to pursue an inflation target to the exclusion of other considerations. This gives the central bankers a license to throw millions of people out of work in order to chase their obsession with inflation.

Giving the central bankers free rein to chase inflation targets could perhaps be justified if they had a track record of success, but they don’t. The world economy stands to lose more than $10 trillion in output because of the central banks’ failure to stem the growth of the dangerous housing bubbles.

Baker’s story identifies more than a democracy deficit. It also points to a multifarious accountability deficit. Who, after all, policies the world’s central bankers? Anyone? They are not even constrained by the markets they would govern, at least they ignore the market system in the short-term. Over the longer-term….

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