Legitimacy Gap

Aditi Sahasrabuddhe in Phenomenal World (Photo by Ibrahim Boran on Unsplash):

We live in the age of the central bank. The financial crisis of 2008 and the COVID-19 crash of 2020 have made visible the central role of the US Federal Reserve and its overseas counterparts in the international financial system. The tasks of central banks are dramatic—rescuing banks and preventing financial collapse—and have earned them applause for avoiding a second and third Great Depression, and have brought relief to the economy. But these actions bore a distributional impact. Most of the financial policies adopted in response to the crisis—quantitative easing, bond purchases, and low interest rates—have protected wealth without creating new opportunities for those who don’t possess it. As the “K-shaped” charts of the 2020 recovery made plain, a market rebound did not spell economic well-being for ordinary people.

The outsize role of central banks—especially the Fed—in the international financial system has led to some skepticism about central banks and their independence. Central bank independence (CBI) grants the Fed immunity from public accountability and political interference. The Fed’s position as an independent authority in an internationally integrated market has allowed it to play, outside national borders, lender of last resort: extending liquidity assistance to foreign central banks through currency swap lines without requiring Congressional approval. Since the 1970s, CBI has been justified using the language of credible commitment and the assumed apolitical nature of monetary policy. Protection from public pressure is thought to allow central bankers to act in accordance with the principles of economics to make policies which are “confidently expected to work.”

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