Larry Summers has been talking about Central Bank independence, and it is certainly about time, but his proposals do not go far enough.   The issue should be included in the terms of reference for a Banking Royal Commission. Click here for link to the Macrobusiness post.

Central Bank independence would be much less damaging if the role of the central bank was more limited.

There is a role for an independent organisation to measure inflation / deflation – using a range of measures – and to advise the government on the stance of fiscal policy required to maintain a stable currency.

Independent and empirically based advice as to whether a deficit or surplus is required for the year ahead would be of real value. The government would then be free to pursue its mandate within that budgetary constraint.

However, the current role for a central bank like the RBA is fundamentally misconceived and quite clearly a failure.

The idea that the RBA and APRA should try to manage the allocation of resources in the economy by controlling the price and access to public money created by private banks is a proven failure on multiple levels.

The most fundamental problem is that the recipients of ADI created money are generally existing asset owners (as banks require those assets to be pledged as security) and that means that asset prices inevitably get pumped. Which means the asset owners get richer and the asset less become relatively poorer.

Rising inequality? You can blame the current model of central bank independence for that.

Not only are asset prices being pumped by the ADI created money but it stagnates in the economy in the bank accounts of the few rather than the many.

You could not invent a more dysfunctional and ineffective monetary system if you tried to.

The ideology behind the current system is simple. Money creation should not be in the hands of the government and the way to do that is to DEMAND balanced budgets – if not every year then over the cycle. Instead as much new public money creation as possible is to be restricted to the credit creation activities of the ADIs aka private licensed banks.

And to make sure this ideological ‘theft’ of the commons (control of public money) cannot be unwound, the ‘regulation’ of this extraordinary privatisation project would be made ‘independent’ and given to the RBA and APRA.

So if you think the system is rigged to pump up house prices and it has gotten worse since central bank ‘independence’ you are not mistaken. It is baked in.

Larry is right to be arguing that “We need to talk about Central Bank independence” but it is the role of central banks in our current monetary system we need to talk about rather than independence specifically.