A Nice Sentence

...how's that central bank independence thing workin' out for ya?

Reminds me of something I said on Twitter about a month ago (summarizing one of Scott Sumner's blog posts).

I've never thought of the central bank independence thing as being particularly a progressive idea, though. "Neo-liberal" maybe. The left never really accepted it. Moderate progressives accepted it grudgingly because moderate conservatives made convincing arguments for it (or arguments that seemed convincing at the time). I suppose conservatives would have preferred a strict mechanical policy rule, but they surely made the case that an independent central bank was better than a political one. I'm guessing that libertarians have tended to be split on the issue, with the ones who favored private money seeing a democratically controlled central bank as the lesser of two evils and the ones who favored a mechanical policy rule seeing an independent central bank as their second best.

Er, wasn't it traditionally the progressives who didn't want central bank independence and conservatives who did?

I thought it was obvious after Geithner's stress tests that the strategy was to recapitalize the banks through easy profits, especially with a steep yield curve. Now, with a flatter yield curve, the profits are less, so the recapitalization process is going more slowly in the last couple of months.

Savers are bailing out the banks. Yields on money markets, CDs, and short term bond funds are at record low yields. Fortunately, inflation is low, so the wipeout could be worse.

Andy,

What are your thoughts on a third alternative of no central bank at all? In theory it may have some justification, but I think the empirical record points to it being beholden to powerful political interests, much like any other federally introduced institution. And at present the Fed is more active in intervening in the private economy and determining winners and losers than at any other point in its history.

It is not true that banks make profits by holding deposits in interest-bearing reserves at the Fed. Deposits are assessed an FDIC fee which depends on the bank's risk structure. The lowest fee is 7 basis points, which suggests an opportunity to make profits holding onto reserves (which earn 25 basis points). However, most banks are in riskier categories, in which the fee can run up to 77.5 basis points. (FDIC fee schedule is at http://www.fdic.gov/deposit/insurance/calculator.html). The average assessment runs around 33 basis points. So accepting a non-interest-bearing deposit and holding it at the Fed is a money-loser for the average bank.