Crisis Threatens to Curb Central Banks

Source:

"For now, actual infringements on independence remain rhetorical or isolated among smaller countries"

Politicians are taking bolder actions to influence monetary policy, signaling that the global financial crisis may end up reining in the independence of many central banks.

In the past week, a policy standoff prompted Argentina's president to fire the country's central-bank (CB) chief—who was reinstated the next day by a court order. In South Korea, the government sent a political official to a CB policy meeting for the first time in a decade. Officials at CBs, including the Federal Reserve, say they worry that similar political challenges are heading their way.

Independence is vital for effective CB operations, economists and central bankers say. Many decisions, such as raising interest rates to fight inflation, are politically unpopular but considered necessary to effectively manage the economy.

That independence is now under threat and is figuring in talks among central bankers gathered in Basel, Switzerland, this week for annual meetings at the Bank for International Settlements. CBs are vulnerable to political meddling because they became deeply involved in government-led efforts to rescue the global economy.

For now, actual infringements on independence remain rhetorical or isolated among smaller countries.

In the U.S., Congress has reacted to a tide of populist anger by calling for greater scrutiny of the Fed's actions. A bill with broad support among lawmakers would subject the Fed to more comprehensive Congressional audits and permit lawmakers to delve deeper into Fed decision-making A Senate proposal would give lawmakers and the White House more say in the governance of the 12 regional banks scattered around the country. Meanwhile, the Obama administration, with the Fed's support, has proposed limiting the CB's ability to undertake last-minute rescues of banks without White House approval.

One country has little concern about the issue of CB independence: China. The Chinese CB is a government department in charge of the nation's monetary policy. The issue of political "interference" never arises in Beijing because there is no independence to compromise.

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