[ExI] Bank of England

[Dan]

--- On Fri, 6/19/09, Stefano Vaj <stefano.vaj at gmail.com> wrote:
> On Fri, Jun 19, 2009 at 3:38 PM, Dan<dan_ust at yahoo.com> wrote:
>> The two views are not necessarily opposed.  It's a
>> myth that any government is under democratic control -- in
>> the sense that "the people" has a major say in the decision
>> making process in government. All governemnts are rule of a
>> tiny minority over the rest of society. (This is not to say
>> that the rest of society is powerless, but democracy works
>> more to calm the masses than to limit elites.)
> 
> Yes. Another way to put it is that *all* governments (we
> should rather
> say "political regimes", since legislation and regulatory
> powers
> administered by career bureaucracy are included here) are
> "democratic"
> at least in the sense that they are held accountable for
> what they do
> by the people they rule, so that at the end of the day,
> continued
> dissatisfaction leads, if not not to electoral defeat, to
> a revolutionary change.

Yes, but the problem with that is most people won't organize for that sort of thing unless conditions are not only really bad, but they feel it's better than the alternative.  Even small groups might be disaffected and still not cause the elites to change their policies.  So, be careful with too many platitudes in this direction.  By this measure -- the majority always wins in the long-run -- the worst dictatorship or the most absolute monarchy is democratic, so the concept of "democracy" becomes useless for distinguishing between different forms of government.  (Rule by a minority, however, seems true and not devoid of empirical content: the masses for the most part will put up with a lot and are basically uninterested in running things.  The elites, on the other hand, tolerate less and are very interested in running things; that's why they're elites and not the masses.)
 
> In this respect, their own interest may or may not
> correspond to the interest of their subjects.

The point is that their interests must clash.  After all, the rulers have to live off the ruled.  It's fundamentally antagonistic relationship -- and the rulers must maintain this (even if unwittingly) by the illusion that they're necessary and the alternatives are far worse.  Rulers who make it appear they're dispensable or that there are better alternatives will, via a Darwinian process, be weeded out by those who can master the illusion.

> For a central bank, which as such is not a
> public agency but a private entity, thus not under the
> direction of
> the government, and the representatives of which does not
> serve at its
> pleasure, its interest exclusively corresponds to... its
> interest,
> period. And as long as it is protected by law - especially
> monopolistic laws - it is under no pressure to (probably
> cannot even) take into account anything else.

Then you have to explain the empirical fact that central banks almost always tend to support the ruling faction in government via their monetary policies.  E.g., Greenspan and, later, Bernanke didn't try to stop inflation which helped to fund the massive spending increases in recent years.  And both Fed chiefs did their best, time and again, to orchestrate bailouts during their tenures -- bailouts specifically aimed, it seems, at shoring up big politically connected institutions.

It seems to me that central banks almost always tend to have their self-interest aligning with the ruling government cliques.  This is not to say there's a conspiracy, but just that they (central bankers) are appointed by these guys and their (the central bank's) power emanates from its government granted and government enforced control over money and banking.  (Of course, the Fed in the US doesn't have total control over banking and the money system.  There are other government agencies that also meddle in these areas.)

Also, that the Fed is private in some sense means little here.  Freddie Mac and Fannie Mae were regarding as private, but they had an implicit guarantee of being bailed out; they both had a special position in the market, being created by the federal government.  So, in some sense, while they were private, they certainly acted like public institutions and had guarantees and privileges none of their competitors had.  Were the Fed, Fannie, and Freddie all left to fend for themselves -- i.e., their privileges and support removed -- it's doubtful they wouldn't either go under in short order or have to radically reform.

Regards,

Dan