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Larry Elliott doesn’t quite grasp central bank independence

Summary:
Larry Elliott tells us that central bank independence has had its day. Monetary and fiscal policy should be co-directed by the politicians because, well, actually, because that would give much more power over the economy to politicians.Which isn’t quite how we think of the good life. But what worries rather more is that Elliott isn’t quite getting the lessons of his own example:Independent central banks were once all the rage. Taking decisions over interest rates and handing them to technocrats was seen as a sensible way of preventing politicians from trying to buy votes with cheap money. They couldn’t be trusted to keep inflation under control, but central banks could.Yes, that’s the justification. Elliott then tells us:A decade on from the 2008 crash, another financial crisis is brewing.

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Larry Elliott tells us that central bank independence has had its day. Monetary and fiscal policy should be co-directed by the politicians because, well, actually, because that would give much more power over the economy to politicians.

Which isn’t quite how we think of the good life. But what worries rather more is that Elliott isn’t quite getting the lessons of his own example:

Independent central banks were once all the rage. Taking decisions over interest rates and handing them to technocrats was seen as a sensible way of preventing politicians from trying to buy votes with cheap money. They couldn’t be trusted to keep inflation under control, but central banks could.

Yes, that’s the justification. Elliott then tells us:

A decade on from the 2008 crash, another financial crisis is brewing. The US central bank – the Federal Reserve – is coming under huge pressure from Donald Trump to cut interest rates and restart QE.

That’s not a refutation, that’s an example. An example of what we’re trying to prevent. Any even casual glance at the American electoral calendar shows that.

The poor state of the German economy and the threat of deflation means that on Thursday the ECB will cut the already negative interest rate for bank deposits and announce the resumption of its QE programme.

And think what the German economy would be like with both the current rather restrictive fiscal policy and also a tight money policy? Which is what would happen given the political leanings in that country.

This is not to argue about the precise state of the macroeconomy in either place. It’s rather to point out that Elliott is using examples of independent monetary policy being a good idea to argue that independent monetary policy is a bad idea.

But then, you know, The Guardian and economics….

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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