Unconventional Monetary Policy and Central Bank Independence

Central bank independence is based on a weird set of political conventions. This starts with the fact that the Fed isn’t really all that independent. Congress could, pretty easily, boss the Fed around. They write the laws, they created the system, they can do what they want. They just choose to ignore that. Meanwhile, under normal circumstances the Fed basically pretends that it’s just making technical decisions and technical adjustments. Doing something called “setting interest rates.” The idea that there are political tradeoffs here, or that the Fed is actually buying and selling stuff on the market is basically kept out of sight.

Lately, though, we’ve been having a lot of unorthodox monetary policy. And when monetary policy gets unorthodox, it gets out of the usual routine ways of talking about. People start paying more attention to what’s really happening, and asking questions to try to understand it. And as the later parts of this Ryan Grim article on the Fed’s latest moves makes clear, that winds up threatening the bank’s independence:

The Fed is already printing trillions of U.S. dollars and pumping them into the global economy in an effort to stave off a financial collapse. Now it plans to start injecting foreign currency, too, according to minutes recently released from its March meeting. [...] Rep. Alan Grayson (D-Fla.), after reading the minutes, describes the Fed plan as “a massive transfer of wealth from the American people to who knows where,” calling it a “round-about bailout.” [...]

On Wednesday, Financial Services Committee Chairman Barney Frank (D-Mass.) called for the GAO to have more authority to investigate the Fed. Grayson says Frank has told him on numerous occasions that Congress needs a better idea of what it is that the Fed is doing.

On Wednesday night, House Speaker Nancy Pelosi (D-Calif.) called on the Fed to post its financial transactions online during a conversation with the Daily Show’s John Stewart. She plans to address “Fed authority” when Congress returns.

Some would say that this is a reason for Bernanke to chill out with the unorthodox moves. Better, this school of thought would go, to more jealously guard the institutional prerogatives of the Fed than to take risks by a making unorthodox moves. My sense is that that’s at least part of what’s going on with the European Central Bank. It’s a new institutions trying to establish its credibility, both in political terms and as an inflation-fighter, so the ECB is willing to take huge risks with the global economy rather than take risks with the bank itself. I think Bernanke, by contrast, is making the right call. And I hope that Pelosi and Frank will realize that, though the circumstances may well call for more disclosure than currently exists, neither of them actually wants to be in a position where they’re setting monetary policy for the United States.