I've been thinking a lot lately about the political theory of an independent central bank. A lot of the libertarians I know have deep issues with the activities of the Fed, which have been largely unaccountable to elected officials.
That's a valid critique. But here's the problem: the Fed has performed vastly better on any metric except "being elected" than the Congress. There's little doubt in my mind that if we had not had an independent central bank, unemployment would be many percentage points higher, GDP would have contracted much more strongly, and we wouldn't now be making optimistic noises about the thing bottoming out.
Where does that leave me?
Pascal-Emmanuel Gobry tackles this question as part of a larger post on the compatibility of democracy and capitalism, and his thoughts mirror mine.
Megan McArdle is very happy that Ben Bernanke, unelected and unaccountable, has a bigger role in the response to the financial crisis than Maxine Waters, and is only able to take the dramatic steps he is precisely because he is unaccountable, and so am I. But -- and I realize this is a cliché, but an unescapable one -- even if you have the smartest technocrats running the country today, what about their successors, and their successors' successors? The historical record of unelected governments in this regard is not very good.
Democracy is not so much about electing people as having a process and a system of checks and balances that ensures that basic rights are protected.
Of course, libertarians and liberals and conservatives all mostly abandon this committment to Democracy when there's a principle they care about at stake; democracy is, of course, good and wonderful, but that shouldn't let the majority dictate their opinion on the position of homosexuality in the public sphere . . .
All the people that I know, left and right, who are currently very worried about the democratic implications of the Fed's actions, seem to spend an awful lot of time trying to insulate their pet cause from the democratic process--whether that cause be property rights or sexual behavior. As an institution, what the Fed is doing now is not much different from what most of them want the Supreme Court to do on some issue or another: rule it out of the bounds of majority debate. All of those people would, of course, say that that's different--their issue is really important, and personal. But trust me, any student of the Great Depression will tell you that what happens in a massive financial crisis is both really important, and very personal.
I'm not saying that as some sort of useless hypocritical gotcha; my ideas are at least as muddy. I'm just saying that I'm having a hard time discerning some firm governing principle upon which to base my views.
Still, the longer I think about it, the longer my thoughts linger on Mencken's famous quote about democracy: 'the theory that the common people know what they want, and deserve to get it good and hard."
I think that the political process will hopelessly screw up the management of this crisis (something which libertarians are perfectly able to see when the government screwing things up is a left-wing populist one in Latin America). But maybe The People, God bless them, deserve to screw up their economy if they want. On principle, I am opposed to saving people from themselves. And anyway, maybe I'm wrong and the wisdom of crowds will prevail.
On the other hand, do they have a right to screw things up for everyone else? Should a populist 60% be allowed to plunge their neighbors deeper into crisis? In the case of America, to plunge the whole world deeper into crisis?
The uncomfortable conclusion I'm coming to is that yes, they should. Ben Bernanke should be hamstrung even though it's likely that this would make everyone worse off. And people who advocate for ending the independence of the central bank should be willing to accept all that this entails: inflationary monetary policy (the people love inflation!), bad and unpredictible banking policy, the collapse of the US economy. I just wish I didn't have to go along for the ride.