Independant Banks, For Who?

The Guardian, February 15, 2010
Answer to the people, not greedy elites: Argentina's president came under fire for sacking the head of the central bank – but why should such institutions be 'independent'?
By Mark Weisbrot

The president of Argentina, Cristina Fernández, recently fired the head of the central bank, Martín Redrado, when he rejected the government's plan to use $6.6bn of international reserves to pay off debt.

The domestic and international press response was overwhelmingly negative, with complaints that this would "kill central bank independence".

Leaving aside the question of whether it is a good idea to use these reserves to pay off international creditors – something that perhaps only the future will tell – is there a good reason why central banks should be "independent" of their elected governments?

The business press, which has the support of the vast majority of economists on this question, thinks there is. The basic argument is that if the central bank is not able to determine monetary policy free of "political considerations", then politicians will force the bank to be "too loose" with monetary policy and the country will end up with dangerously high levels of inflation.

This would seem to be a tough argument to swallow for anyone who believes in representative democracy. Fiscal policy – the government's decisions with regard to spending and taxation – is also a major determinant of economic activity. There are important tradeoffs that affect the livelihood, income and employment of most of the population. Yet in the US, these decisions are entrusted to our elected representatives in Congress, together with the executive.

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