By Thomas Palley
On the author’s blog, Economics for Democratic and Open Societies.
Federal Reserve Vice Chairman Richard Clarida has shot himself in the foot with what appears to be insider trading. This follows earlier concerns about inappropriate trading by regional Federal Reserve chairs Robert Kaplan and Eric Rosengren. Although unintentionally, the good news is that these indiscretions may have done working families a favor by helping to disprove the notion of central bank independence.
For years, many of us have argued that central bank independence is a charade to facilitate the control of central banks by financial interests. Here is a link to one of my articles titled “Central Bank Independence: A Rigged Debate Based on False Policy and Economics”.
In that article, I wrote that each central banker “inevitably brings their own preferences, opinions and biases to the policy table (p.77)”. The implication is clear: appoint people from Wall Street and they will bring the political preferences of Wall Street; appoint affluent financial economists with large stock portfolios and they will bring personal concern with the stock market and asset prices.
Federal Reserve chairs and governors typically come from the banking community, Wall Street, and neoliberal academic economists. For decades, activists have demanded to be drawn from a broader political and economic spectrum of society to give better representation to working families, but this demand has been rejected as unjustified.
The Clarida-Kaplan-Rosengren case argues the opposite. This suggests how much private interests are still present in the room. It also shows why entrusting the keys of the central bank to so-called independent bankers does not magically solve the problem of monetary policy decision-making, which is why analytical diversity is a question of public importance.
Messrs Clarida, Kaplan and Rosengren will survive and prosper. Wall Street will also continue to alter policymaking via its pre-pension/post-pension incentive model. The episode’s silver lining is an opportunity to bury the ideological doctrine of central bank independence and open up the Federal Reserve to a broader set of ideas and personnel.