economic 102

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Central Bank independence concerns the amount of influence legislators and politicians have on the operations and decisions that central banks undertake. The general consensus among academic economists is that the amount of influence from democratically elected politicians over central banks should be extremely limited. They fear that politicians will generally try and keep interest rates too low for too long in order to “juice” the economy and gain votes from citizens at the expense of increasing inflation. Academic economists feel that independent, technocratic central bank officials will not succumb to such shortsightedness and will do what’s best for the economy and strike a balance between keeping the economy at full employment and maintaining their inflation targets. They are assuming however that somehow these independent technocratic officials are benevolent and don’t have ulterior motives that can conflict with their responsibilities, which is somewhat contradictory considering most academic economists feel individuals are “rational” and do what is in their own self-interest.

We have learned from the text that the United States’ central bank–the Federal Reserve—has a dual mandate from Congress to maintain maximum employment and stable prices (low inflation). However, these two mandates can conflict with one another, due to the fact that low unemployment rates can (stressed) increase workers bargaining power, which could possibly lead to increased inflation and vice versa. There is also the important fact that higher and variable inflationary rates are of huge concern to the banking sector and financial industry because higher and unexpected inflation can eat into their profits. The 12 Federal Reserve regional banks are heavily influenced by large commercial banks such as JP Morgan, Bank of America, Wells Fargo, etc. This means that banks have enormous influence at the Federal Reserve, whereas labor unions, consumer groups, and other citizen groups don’t have a seat at the table. In addition, there is a revolving door between the financial sector and the Federal Reserve, where many lower and high level officials move onto lucrative financial sector positions once they leave the Federal Reserve. For example, both of the two most recent past chairs of the Federal Reserve, Alan Greenspan and Ben Bernanke, have both gone onto highly lucrative consulting positions for Pimco, which is a financial firm that places high stake bets on the actions of the Federal Reserve. The fact that the financial industry exerts so much influence and engages with the agency so frequently can lead to a “cognitive capture” where Federal Reserve officials begin to think in terms of what’s best for the financial industry and shrug off concerns of average citizens.

Assignment:

Read the following article from Reuters which details the relationship between Pimco and the Federal Reserve during the financial crisis and the Federal Reserve’s quantitative easing program:

http://www.reuters.com/article/2013/09/27/us-usa-qe3-pimco-special-report-idUSBRE98Q0E620130927 (Links to an external site.)Links to an external site.

Assignment:

After reading it write about whether or not you agree with the academic economic consensus that independent officials running the Federal Reserve are able to properly balance their dual mandate in a fair and balanced fashion with the needs of workers in one hand and the financial industry on the other. If you agree with the consensus view explain your reasons; or if you disagree and think that the officials are biased in favor of the financial industry explain your reasoning with some possible solutions to the problem. Write at least two paragraphs articulating your views.

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