Ben Bernanke

The price of independence is limited power. Central banks that only try to control inflation, and only using one tool, such as purchases and sales of Treasury debt, can be walled off from the political process. As a country, we can decide that the price level will not be used for political purposes and assign its maintenance to technocrats.

Since the financial crisis the scope of the Fedas regulatory duties have increased, and Mr Cochrane frets that this will ultimately undermine its independence.The more powerful it becomes, the more accountable it needs to be.

Another new development in central banking is increased transparency. No one obsessively speculates about the demeanour of Ben Bernanke (the way we used to with Alan Greenspan) in order to guess the future path of interest rates. The Fed now has an explicit inflation target and has been open about what rates will be for the next few years. At first, this increased transparency seemed to be consistent with independence and with Mr Bernanke’s status as a scholar. As an academic he advocated a clear and consistent policy framework as the best practice of an effective, credible and independent central bank. But I recently spoke with a former Fed governor who claimed that the Fed must be more transparent to justify some of its extraordinary interventions. Does this make it more accountable for short-term economic performance, thereby undermining its independence? He says no, this level of transparency ultimately preserves independence. I admire Mr Bernanke for following many of the principles he preached as an academic. But sometimes I wonder if a cult of mysticism around the Fed chairman had its merits.

And while the Fed may be more transparent when it comes to its traditional roles, the Wall Street Journalsuggestsit has become less transparent when it comes to its new regulatory powers.

The Fed is making these sweeping changesathe most dramatic since the Great Depressionaalmost completely without public meetings. Rather than discussing rules and voting in public, as is done at other agencies with which the Fed often collaborates, Fed Chairman Ben Bernanke and the Fedas four other governors have held just two public meetings since July 2010. On 45 of 47 of the draft or final regulatory measures during that period, they have emailed their votes to the central bankas secretary.

Needless to say this is has not passed unnoticed:

The Fed isnat breaking any laws by not having open meetings. But it is breaking from a long tradition of airing regulatory matters at open meetings. Bipartisan criticsaincluding lawmakers and former regulatorsasay the Fedas cloistered approach deprives the public of insight into how rules are being written and makes it harder for Congress and others to hold them accountable for their decisions.

aPeople have a right to know and hear the discussion and hear the presentations and the reasoning for these rules,a Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corp., said in an interview. aAll of the other agencies which are governed by boards or commissions propose and approve these rules in public meetings,a she said. aI think it would be in the Fedas interest to do so as well.a

So it does seem that more power does demand greater transparency and accountability. One wonders if that can coexist with independence. The Economistdetails in the most recent issue just how bad policy can be when set at the whims of interested political parties. After reading ourbriefing on Dodd-Frank, which describes the Fed’s new regulatory responsibilities one has to feel concern about the central bank’s status. An interesting line from the briefing:

If the roles of many of these Dodd-Frank entities are overly familiar, their fundingawhich often skirts constitutional requirements for congressional approvalais more exotic. The new research bureau in the Treasury will be entitled to the proceeds of a new tax on banks. The new Consumer Financial Protection Bureau (CFPB) will be funded by the Fed.

This strikes me as weird. As Fed regulatory power grows so will its size. Financing for new activities relies on curious attrangements. Central bank operating budgets normally come out of revenues from their investment portfolio, and not directly from the printing press. Thereas good reason for that; it keeps the central bank independent and avoids the slippery slope of the government printing money to fund itself. The Fed balance sheet has gotten so enormous that it could support a small army right now, but I was under the impression that the size of its asset portfolio was temporary, built up to combat a very bad recession. Granted, at its present size, the Fed’s balance sheet could pay nearly 300,000 workers a salary of $100,000 a year for 100 years. That’s a lot of regulating. The principle matters, however. I take independence seriously, and I’m getting nervous.

aC/Market size and entrepreneurship (Sato Yasuhiro, Tabuchi Takatoshi, and Yamamoto Kazuhiro)

aC/Is intergenerational economic mobility lower now than in the past? (Bhashkar Mazumder)

aC/Investor inattention during FIFA World Cup matches (Michael Ehrmann and David-Jan Jansen)

aC/What does human capital do? (Daron Acemoglu and David Autor)

aC/Ben Bernanke and the zero bound (Laurence Ball)

aC/Western Europe’s growth prospects: an historical perspective (Nicholas Crafts)

The Bank’s action is particularly interesting given the dynamics of international trade. Japan’s export performance in 2011 was a dismal one. The substantial supply-chain disruptions associated with last year’s seismic and nuclear disasters were obviously a big part of that. But the deterioration in Japan’s trade balance is about more than just a one-off catastrophe. Exports should have been mostly back on track by the end of 2011, but sales abroad nonetheless sufferedaincluding those of automobiles, at a time when car producers from America to Britain to Europe are reporting good figures. And indeed, Japanese net trade has been moving toward a deficit for most of the past half decade, as the chart at right indicates. (Its continued, large current account surplus is do to earnings on foreign assets, but that, too, is dropping.)

This shift coincides with a substantial appreciation of the yen. Since the beginning of 2006, the yen has risen more than 34% against the dollar. It rose against the euro from 2006 until the financial crisis of 2008; since that time it has soared 33% against the euro, and has risen nearly 16% against the single currency since May of last year. The appreciation prompted Bank of Japan intervention last year to weaken the yen, a move that generated a short-term drop in the currency but no long-run halt to its increase.

Generally speaking, this is the sort of thing we’d expect to see happen after a long period of imbalance. And adjustment should take place; Japan should begin deploying its savings to consume more than it produces, and one mechanism through which the adjustment might be expected to occur is via currency appreciation. As it happens, Japan’s ageing population is saving less. The shift is not as healthy as one might hope, however, for a couple of reasons. First, domestic consumption isn’t generating demand sufficient to power continued growth. And second, the change in the trade balance suggests that foreigners will be responsible for financing an increasing portion of Japan’s very large public debt. That could eventually lead to higher bond yields and a Japanese debt crisis, though it is admittedly quite difficult to see signs of such dynamics anywhere in the data.

What one doessee, however, is the impact of Japan’s chaging trade patterns in economic figures elsewhere: the euro zone, for instance. The euro-zone economy shrank at about a 1.3% annual pace in the fourth quarter of last year (which included a rather nasty 3.4% drop in Italian output). Things might have been worse for the euro zone without an improvement in its external balance. The euro-zone’s external trade deficit declined from nearlya!15 billion in 2010 to just undera!8 billion in 2011. The euro-area’s trade balance improved relative to most of its large trade partners (with a few exceptions, like China and Russia). Its balance with Japan showed an especially strong shift; exports to Japan rose by 14% between January and November of 2011 relative to the same period a year earlier, while imports from Japan increased just 2%.

External surpluses will be critical to the euro zone, given resistance among its surplus economies (like Germany) to intra-euro-zone adjustment and difficulty among its deficit economies (like Italy) in achieving same. This dynamic illustrates the nature of the global growth problem, however; very nearly everyone wants to raise net exports. America and Britain are no exception, leaders in both countries speak incessantly about rebalancing. There is domestic demand potential in big surplus economies like China, but its leaders are very concerned about their ability to maintain steady growthaa must in a year of political transition.

It is encouraging to see the Bank of England, the Bank of Japan, and the Federal Reserve all working to raise growth through stimulus primarily focused on the domestic economy. (While Japan’s central bankers would surely be happy to see the yen fall, they’re not, for the moment, following Professor Ben Bernanke‘s advice to print yen and buy foreign exchange. The risk, however, is that too much of the global adjustment will occur through import compression. That has been the case in Japan, despite the central bank’s efforts. That is going to be the better part of the near-term strategy around the euro-zone periphery, as well; adjustment will occur via an austerity that crushes domestic demand.

One would hope to see adjustment occur as former surplus countries grow into demand engines. While that process occurs only slowly, the world economy will be vulnerable to outbreaks of recession, and the risk of market interventionsaincluding protectionism.