Fiscal Fallacies: 8 Myths about the 'Age of Austerity'
Myth #5: Central banks must be completely independent from public scrutiny to avoid hyper-inflation
““The only good central bank is one that can say no to politicians,” The Economist famously declared, half jokingly, in 1990. And the myth still lives on. Central bankers, so the argument goes, must be insulated and detached from public policy and scrutiny to prevent governments from using monetary policy to run up out-of-control deficits, and thus stoke high levels of inflation, which is indeed bad for everyone. Instead, monetary policy should be run in a disinterested, objective and scientific manner, independent of political winds, by impartial and technocratic central bankers. Central banks should be in essence “benevolent dictators,” free from the pressure of voters but entrusted to do what’s best for all.
Did you know?
The decisions of central bankers can have more impact on jobs and growth in times of recession than many of the policies debated by legislators. Monetary policy, conducted by central banks, directly affects the resources available for the realization of economic and social rights, especially the right to work and in many countries the right to housing. It does this by influencing interest rates, exchange rates and the amount of credit available in the economy. Higher interest rates discourage borrowing and make credit more expensive. When central banks raise interest rates economic activity slows and there is less job creation. When central banks choose to prioritize low inflation over all other considerations including employment, such as the ECB’s target of two per cent inflation, they raise interest rates to achieve this preeminent goal, it can wreak havoc on growth in the real economy, pushing needed commercial loans out of reach for companies and worsening unemployment.
Despite the human rights principles of public participation, transparency and accountability throughout the economic policy cycle furthermore, monetary policy decisions are largely made without democratic input, oversight or control. Independent from public scrutiny and accountability, a small, secretive group of central bankers are taking economic policy decisions which have clear and far-reaching impacts on the fulfillment of economic and social rights, with little or no public participation or scrutiny. While central banks have achieved relative autonomy from the influence of governments and demands from citizens, they have not insulated themselves from being heavily swayed by the interests of the financial sector they are responsible for regulating. As one former IMF economist concluded, “in practice, unfortunately, the New York Fed and the Board of Governors are quite deferential to financial-sector ‘experts.’ Bankers are persuasive; many are smart people, armed with fancy models, and they offer very nice income-earning opportunities to former central bankers.”
“Independence,” writes one commentator, “is politically viable only with accountability, and the best way to enhance accountability is for central banks to become more transparent and forthright about their objectives and tactics.”
Human rights responses
Central banks are in the end government bodies, and therefore subject to human rights obligations under international law. Taking these obligations into account when formulating monetary and financial regulation policies would as a first step require an open-book and transparent process, based on certain needed privacy safeguards yet biased away from financial sector influence, and affording more influence to public participation and the provision of public goods in the overall design of policy priorities. Channels of accountability would also need to be established to ensure that central bank decision-makers face consequences for failing to take into account their human rights obligations. Taking human rights seriously would also provide an opportunity many central bankers are seeking to temper the single-minded, inflation-targeting obsession with other duties to support decent work opportunities and affordable housing for all. Finally, meaningful human rights protection as a central policy priority of central banks would require the prevention of future financial crises through effective regulation in the public interest. To do so, governments and central banks would need the freedom to use all of tools available to implement policies in favor of the progressive realization of ESC rights.
Photo of European Central Bank headquarters in Frankfurt courtesy of Enrico Wloch / UggBoy♥UggGirl. This briefing can be accessed in pdf format here.