No More Opaqueness; Banks Should Prioritize Independence

20210 박채리

Every time I think about banks, I remember my childhood fantasy about it; men in suits would open the doors for the customers and with smiles on their faces, they would give presents, like sketchbooks with their logos, to children. Back in those days, I wouldn’t even care about who ran these banks as long as they would give me presents or sweets. However, my brain has evolved just like any other human being’s, and therefore I became capable of thinking about who actually was behind these banks (and the presents too), and I found out that the central bank was behind all of this. Then I began questioning: was the central bank really doing the right thing? Couldn’t things get better?

        The answer lies in the goal that the central bank wants to pursue, which is usually on the spectrum between democratic accountability and independence at its two ends. Democratic accountability is an idea that  a bank should be transparent to the public  and therefore that it should be run by the government, while  independence is an idea that experts should run the banks because politicians might not have sufficient knowledge to effectively manage the economy.

        Delving into this idea deeper, I’ll first examine the idea of independence. People who support independence say that politicians would manipulate monetary policy for their short-term benefits of being elected. They argue that with an independent central bank, markets would be able to work more efficiently, as experts with authorities would take over the banks. Moreover, because these people are not elected, they would not succumb to populist ways that might actually harm the country but use financial tools in the best way possible. Also, the advocates of the idea of independence have a lack of faith in democratic accountability.

Then let’s examine what the advocates of democratic accountability say. They firstly talk about how “independence” isn’t really independence, as the financial sector captures the central bank. Capture, in this context, means cognitive capture where the banks now function in ways that could actually help the financial sector. However, they say, if banks are run by the government, they would be more transparent as democratic accountability would take place. Also, they say that a nation and its economy should be managed after examining many aspects and outcomes, but independent banks would only care about particular aspects and would not have a holistic approach.

        Both sides of the spectrum sound persuasive; they both make sense and they could both bring different benefits to the economy. In this case, what side of the spectrum should the banks prioritize? My answer is independence, but only with some conditions and reforms.

        Why should the banks place more weight on independence? The answer is simple; because they need to be run by financial experts who know better and who can make better decisions regarding the macroeconomy. This benefit is unique as it could only exist when banks are independent; banks being run by the government would mean that people with expertise are not going to be able to have a say in economic problems. Moreover, while the advocates of democratic accountability say that having experts run the country could be harmful because they would only think about the economy, I say that this could actually be a benefit as those experts would concentrate on the economy better than the government-run banks, which might make some economic sacrifices in a holistic view. Moreover, these economists would not care about re-election and concentrate wholly on economics.

        However, in order for effective independence to happen, there should be some reforms made so that what the advocates of democratic accountability worry about would not happen. The advocates argue that capture by the financial sector would happen as the financial sector would want experts who share their goals to run the banks. This is 

something that could actually be reshaped by reforms, while these  reforms would not be able to change the government not knowing well about the economy. So what are these reforms?

First, the experts should not be chosen but rather the process should be random. By random, I do not mean picking balls from a box. Rather what I mean is that after the first process of submitting documents to prove that you are an expert (which should be a blind process where your names aren’t opened so that bias would not exist), you should pick the experts randomly between people who have passed the first step. This way, we know for sure that the experts would indeed have expertise and also not be captured by the government or the financial sector.

Second, the power of the banks should be limited so that they would not be able to control the whole nation but only take care of the economy. These economists would lack political expertise than politicians or the government, and therefore should leave the government alone. They would make economic decisions and nothing more.

Moreover the banks should be transparent, and in order for this to happen, the government should make the banks follow a guideline as to which aspects of the economy they would like to prioritize in making decisions and the goals they want to achieve. This way, the government could see if the actions the banks are taking are befitting the guidelines they have provided, and could check if the banks are doing their job. Also, if the guideline itself seems unfair (for example, if they say that they would prioritize the top 1%), the government could now see that the banks are going the wrong way and might get some control over it. However, wrong guidelines would not exist in the first place as their reputation matters and the citizens would get to know about what they did, and therefore, they would make ideal guidelines.

I hope that banks would be remembered positively just like how I had thought of banks as “present-givers” when I was young; they should be remembered as “present-givers” to the economy.