Are central banks really independent?

After yesterday’s suggestion that a brick would do as good a job as Phil Lowe at the RBA owing political sensitivities, Goldman Sachs offers this chart on central bank independence:


The Goldman piece was about highlighting how the US Fed doesn’t actually have that many legal protections if Trump decides to test his powers.

I didn’t realise how poorly the RBA rates on independence – particularly legal. Peter Costello’s changes to “enshrine” independence are held up as one of his crowning achievements. Bottom 3 of about 50 countries doesn’t seem like a position that Australia should be pleased about.

Perhaps that’s one reason why its governors are so touchy.

Damien Klassen is Chief Investment Officer at the MB Fund launching in April 2017. Register your interest now (if you haven’t already):

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  1. The survey surely ignores the state of our Parliament. Any reduction in the independence of the RBA would need to go through the Senate.

    • Stewie GriffinMEMBER

      Central Banks should be answerable and headed by an elected representative i.e. a politician in government.

      Only then will the endless shirking of genuine fiscal reform in favour of further of ‘Independent’ central bank easing, will be eliminated. The current system allows each institution to shift the blame to the other with the result of nothing being done.

      If the Government blows up the economy with their ineptitude, so be it – at least the current generation responsible for electing the useless dickheads will have to wear the cost, instead of the can being kicked down the road.

    • Jumping jack flash

      be careful what you wish for. We know what happens with those trading algorithms when conditions deviate sufficiently from the ‘norm’

  2. I wonder where the RBI governor would sit on this graph.

    The previous RBI governor from Chicago uni was asked to cut interest rates but refused to and he was then told to re-apply for the job of governor instead of getting an automatic 2nd term. So he quit and went back to Chicago uni.

  3. Unfortunately uncovering more smoke & mirrors isn’t a surprise, just another in a continuous conga line of political disappointments.

  4. Who ever thought the RBA was an independent authority? The regulatory framework doesn’t even come close to the ECB for example and thank the heavens that it doesn’t when you view the manner in which non elected bureaucrats in the Eurozone trash the lives of ordinary people. I’ve argued long and hard that the RBA is a function of Government and that any semblance of independence should be removed. The issue of independence effectively separates monetary and fiscal policy and we have seen how well that’s worked out – NOT!
    In a macroeconomic sense, there is no objective advantage in having a separate and independent central bank. So let’s not get all heated about not being as independent as in other countries – in actual fact it’s a good thing for citizens unless your a king hitter in the parasitic FIRE sector.

    • “we have seen how well that’s worked out – NOT!” Spot on! Hard to envisage how the outcome could be much worse – if we use a tuime horizon longer than 12 months.

    • Agree – the whole idea of central bank independence is a joke.

      Most people think central bank independence was about ensuring that governments don’t go crazy and spend too much.

      As we have seen over the last two decades with the current model of a bunch of independent unelected ‘technocrats’ the real risk is private banks creating private bank credit that has “lender of last resort” protection. In other words treating the IOU s effectively as if they were issued by the state.

      We would be much better served by letting the private banks go back to issuing their own IOUs under their own name – real private bank notes – rather than cloaked in the public name – and leave the issuance of public money to the public sector.

      The idea that the public sector issuance will not be watched like a hawk is laughable. People will be watching the supply of new public money like hawks so to assess whether it is being ‘devalued’. So excessive deficits will be an issue but at least they will not be muddied by massive private bank credit creation.

      Even after this change what is much more likely to remain a problem is that private banks will again engage in the fraud they used to engage and go bust with regularity.

      Fortunately the general public will not be forced to save with them as they can save in the public money issued by the public sector. They can choose of course to ‘invest’ in private banks but if they do it will be no different to buying shares or any other risky asset.

      Keep public and the private money separate and we will be heading in the right direction.

  5. I always find it ironic, that at the heart of “free market”, capitalist economies, there is a central bank, controlling the supply the supply of money in a centrally planned, communist way.

    • Just look at the Sydney Airport private monopoly!

      Nobody is allowed to build a rival to Sydney Airport within a 100 kilometre radius!

      Look at the ban on luxury showers and toilets. Apparently government should decide how and how quickly I clean my body.

    • Hmm I don’t mean to troll your comment but could write a book on this one.
      Money supply is actually not a function of the RBA with the exception of hard currency to facilitate cash transactions. We need to distinguish between horizontal and vertical money operations. PFT007 will have a crack at me I guess, but the supply of money (not hard currency) is provided by the commercial banking system in the form of credit. the RBA controls reserve levels, enables the facilitation of interbank transactions, manages the target rate, but the commercial banks will lend whenever and wherever they see fit to do so. The money supply (loans, credit etc) in reality is created out of thin air and the banks shuffle around their reserves to meet RBA criteria and sometimes pay a premium to the RBA to balance their required reserves.
      This money supply theories taught in Uni fresher courses is from old text that related to the gold standard era, but in a fiat world the RBA doesn’t control the money supply. That’s a short version but the detail can be found here
      When we understand how banks work in the real free world we can avoid the mainstream mistakes.

      • Thanks, Malcolm. That was a useful link.

        However, it seems that the RBA still has an influence over the cost and availability of money – they lower interest rates, and so do the banks, reducing risk and creating more money to lend.

      • Oh yes epsi, they have influence with their target rate, but it’s quite minor compared to the credit creation potential of the commercial banks. The influence is a subset of why they have a target rate, but the banks no longer follow the RBA interest rate cuts and are moving independently of the RBA target rate as we have seen I recent years. This reflects the reality that they don’t borrow to lend.

  6. To see Japan ranking near the top for ‘Central Bank Independence’ is somewhat surreal. Kuroda is not independent of Abe, who appointed him.

  7. Any adult that believes a Central Bank (pick whichever one) is truly independent needs their head read.

    They are ALL ultimately answerable to the State because that is who confers their legal status. How can the entity which has a monopoly on printing that country’s currency and setting the cost of credit be anything other than a State organ, FFS.

  8. If central bank “independence” is established by legislation by the parliament their independence can be changed/redefined quite quickly and this is easy when the same party controls both the upper and lower houses, although in some types of government a veto might exist in a president or governor but this veto does not exist in Australia.