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Thread: Why do Central Banks have to be independent?

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    Politics.ie Member Windowshopper's Avatar
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    Default Why do Central Banks have to be independent?

    I was watching this week's edition of the Week in Politics where the governor of the Irish Central Bank, Patrick Honohan, was being interviewed and a couple of question sprung up in my head:

    What does Central Bank Independence actually entail?

    What is the rationale behind Central Bank independence?

    And if any poster is against Central Bank Independence then why are you against it?

    *Also could the mods correct my title it should have been 'why do central banks have to be independent?'
    Last edited by Windowshopper; 11th February 2013 at 01:58 AM.

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    Quote Originally Posted by Windowshopper View Post
    I was watching this week's edition of the Week in Politics where the governor of the Irish Central Bank, Patrick Honohan, was being interviewed and a couple of question sprung up in my head:

    What does Central Bank Independence actually entail?

    What is the rationale behind Central Bank independence?

    And if any poster is against Central Bank Independence then why are you against it?

    *Also could the mods correct my title it should have been 'why do central banks have to be independent?'
    Because the alternative is to give control of the money supply back to government. Politicians will print money to buy elections. Many think they have the magic bullet to run the economy.
    The other alternative is to have a free banking system and let bankers control the money..imagine that.

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    GDPR Deleted
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    So the Germans can't tell them what to do.

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    Politics.ie Member Windowshopper's Avatar
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    Quote Originally Posted by ManUnited View Post
    Because the alternative is to give control of the money supply back to government. Politicians will print money to buy elections. Many think they have the magic bullet to run the economy.
    The other alternative is to have a free banking system and let bankers control the money..imagine that.
    That's what I imagine the answer was. I don't know it seems to be fundamentally quite an undemocratic and the belief of a 'magic bullet' cuts both ways. An independent board of technocrats might led to hubris which would blow up in their face. At least with an independent judiciary an outrageous decision can be reversed by referendum.

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    So indebted Governments don't print the currency into oblivion.

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    Quote Originally Posted by Windowshopper View Post
    That's what I imagine the answer was. I don't know it seems to be fundamentally quite an undemocratic and the belief of a 'magic bullet' cuts both ways. An independent board of technocrats might led to hubris which would blow up in their face. At least with an independent judiciary an outrageous decision can be reversed by referendum.
    You are forgetting that a central bank is a creature of statute. They are restricted in what they can do. The legislature can amend the statute or even disband the entire operation. Democracy satisfied?

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    Politics.ie Member stopdoingstuff's Avatar
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    It must be pointed out though that in many cases, independent central banks are not as independent as we would imagine. If we look at how Shinzo Abe has bullied the Japanese central bank versus the rather cool way in which the Bundesbank and the Swiss central bank conduct(ed) their business, we can see that an awful lot depends on the specific balances of foreces within each country. And as for the Fed....well.......
    Faoi mhóid bheith saor

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    Neary, was he independent???????????

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    Quote Originally Posted by stopdoingstuff View Post
    It must be pointed out though that in many cases, independent central banks are not as independent as we would imagine. If we look at how Shinzo Abe has bullied the Japanese central bank versus the rather cool way in which the Bundesbank and the Swiss central bank conduct(ed) their business, we can see that an awful lot depends on the specific balances of foreces within each country. And as for the Fed....well.......
    That's true. I remember an interview with the financial regulator during the boom (Neary?). He was asked about the whole light touch regulation business. He hinted (and this is from memory so I might not have it completely right) that although the CB acts independently it was mindful of the prevailing political ethos of the day.
    I say mindful but maybe 'aware' or 'attentive' may be better words. I don't think for one minute that they were doing anything untoward by the way, just human nature I suppose.

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    Politics.ie Member stopdoingstuff's Avatar
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    Quote Originally Posted by ManUnited View Post
    That's true. I remember an interview with the financial regulator during the boom (Neary?). He was asked about the whole light touch regulation business. He hinted (and this is from memory so I might not have it completely right) that although the CB acts independently it was mindful of the prevailing political ethos of the day.
    I say mindful but maybe 'aware' or 'attentive' may be better words. I don't think for one minute that they were doing anything untoward by the way, just human nature I suppose.
    This is true, and we also must remember that in many cases, though not all, there is an institutional bias to see things from the point of view of other banks, and this often leads them to act for the good of the financial sector rather than the economy as a whole. I suppose that would be especially true of the Fed, since it was in essence set up by Morgan, Rockefeller and Warburg. And in certain places like Asia, they functioned more like National Banks who acted to support the states' industrial policy for decades and probably never shrugged it off.
    Faoi mhóid bheith saor

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