Around the democratic world, there is a power struggle taking place that might end up being the most damaging and long-lasting consequence of this era of populism. Elected leaders — from President Trump to Turkey’s Recep Tayyip Erdogan to India’s Narendra Modi — have been steadily attacking the independence of their nations’ central banks. This could end very badly.
A brief history of modern central banking. As the Economist points out, politicians in the 1970s would routinely use central banks to goose the economy before elections to help them win. This helped create a wave of inflation that paralyzed economies and caused untold misery. The middle class saw its hard-earned savings evaporate within a few years.
As a result, over the past three decades, countries around the world have given central banks much greater independence. The United States was one of the leaders in this regard, with Paul Volcker asserting the Federal Reserve’s independence and breaking the back of the “stagflation” that had crippled the U.S. economy during the 1970s.
Today, it is Trump who is leading the charge in the opposite direction. He is attacking the Federal Reserve and asking it not only to cut rates but also to actually engage in emergency measures to boost the economy — at a time of robust growth and low unemployment. To ensure the Fed complies with his wishes, he plans to nominate two candidates to its board whose main qualification appears to be a slavish devotion to the president. [Continue reading…]