The Munk Debates Podcast - Be it Resolved, Central Banks have not adequately represented the public interest

Episode Date: April 26, 2023

Just when inflation seemed to finally be cooling, high interest rates claimed their first major victim: Silicon Valley Bank. And yet, central banks around the world claim the job is not finished, and more needs to be done to curb runaway inflation. But for some economists and business insiders, the latest debacle confirms a long held belief that central banks have largely failed as public institutions.  Their supposed neutrality is a farce, and they are inherently political bodies run by unelected officials. Democracy requires more than accountability, transparency, and good deliberation. It requires democratic power: the power of the people and their elected officials to steer policy. They argue central banks are in desperate need of transformation to better serve the economy and the public.  But others argue that the central bank has largely succeeded at seeing the global economy through turbulent times over many decades.  The fact that central bankers play an important role in society, but are unelected, does not mean that central banks by their very nature are inherently democratic.  And while some minor reforms may be warranted, central banks have been and remain one of the most resilient and effective public bodies.  Arguing for the motion is Thomas Palley, the former Assistant Director of Public Policy at the AFL-CIO. Arguing against the motion is Steve Kamin, Senior Fellow at the American Enterprise Institute, where he studies international macroeconomics and monetary policy. The host of the Munk Debates is Rudyard Griffiths - @rudyardg.   Tweet your comments about this episode to @munkdebate or comment on our Facebook page https://www.facebook.com/munkdebates/ To sign up for a weekly email reminder for this podcast, send an email to [e-mail].   To support civil and substantive debate on the big questions of the day, consider becoming a Munk Member at https://munkdebates.com/membership Members receive access to our 10+ year library of great debates in HD video, a free Munk Debates book, newsletter and ticketing privileges at our live events. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue - https://munkdebates.com/   Senior Producer: Jacob Lewis Editor: Kieran LynchBecome a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

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Today's debate, be it resolved, central banks have not adequately represented the public interest. Well, central banks around the world are risking recession and raising interest rates. Some of the world's largest central banks are coming together to stop the global banking crisis from growing even further. The Treasury and Federal Reserve are being run by amateurs. The Fed only knows how to fight inflation by trashing the economy. Hello, I'm your moderator, Roger Griffith. Well, just when inflation seemed to finally be cooling, high interest rates claim their first major victim, Silicon Valley Bank.

The central banks around the world rushed into calm financial markets and ultimately bail out not only Silicon Valley Bank, but signature bank and credit suites. Swiss, people have started to wonder, to what extent are these institutions, that being central banks, in fact, neutral? Do they instead represent powerful vested interests in the financial sector? And are those interests actually aligned with the public good, with what is in the best interests of average people in their working day lives coping with an economy dealing with high systemic rates of inflation?

My views on J-Powell are well known at this point. He has had two jobs. One is to deal with monetary policy. One is to deal with regulation. He has failed at both. Others argue that central banks have become essential organizations in our current financial moment. As the global economy confronts high levels of inflation and financial instability, central

banks are ideally suited as independent arm blanks institutions to address the economic headwinds facing the global economy. Without central banks, we are at risk of politicizing the very decisions on which politics should have no bearing, that being the future direction and course of inflation, the economy, and the stability of the global financial order. On this installment of the Monk debates, we aim to go deep by what it means to be a central banker today. Are they acting in the public interest or not? We'll find out by debating the motion, be it resolved, central banks have not adequately represented the public interest.

Arguing for the motion is Thomas Pally, the former assistant director of public policy at the AFL-CIO. Arguing against the motion is Steve Kamen, senior fellow at the American Enterprise Institute and former Fed official. He studies international macroeconomics and monetary policy. Thomas, Steve, welcome to the Monk Debates. Hi, Rod did. Thanks for having us on board.

Yes, hi, right here. It's a pleasure. Very timely debate today. Central banks have taken up a lion's share of the public's attention over the last year as interest rates have been hiked to fight off rising inflation. It's raised a whole series. series of questions about their mandate, their role and impact on the economy and on society as a whole. So the opportunity to debate our resolution with you today is fortunate indeed.

That motion is be it resolved. Central banks have not adequately represented the public interest. Thomas, you are arguing in favor of the motion. So as per debate convention, we're going to put a couple minutes on our show clock and turn the program over to you. Thank you for inviting me and thanks to the Monk podcast for addressing this really important issue. And we're really experiencing it right now in this six-month phase of rising interest rates. It's affecting the economy. It's already affected financial markets. We're seeing the power of central banks at work.

And we need to debate that and I hope we'll have a good job on that. I do want to set, just as I begin, a little bit of table setting. And that I think that Steve and I would both agree that public central banks are needed. It's not the issue of central banks itself, that is, that central banks per se that we're going to debate, but how they conduct their policy. A world without central banks is a world of financial chaos. That was the history of the 19th century. And that's why we came up with the institution of central banks.

at the beginning of this century. If you want to know what a world without central banks would look like, think of the cryptocurrency market and no regulation, nothing going on. So I think both Steve and I are on board about that. But what I want the shape of the debate to follow, I hope, I see it in two dimensions. One is first to engage the sociology of central banks, the organization of central banks, who runs central banks? And then after that, we can then, I hope, begin to dig into the question of the policies they've pursued.

And for me, central banks are essentially run by Mr. and Mrs. Wall Street, or to a degree I'll also argue by Mr. and Mrs. A.I, who Steve works for. And the result of that, of that sociological organization is you get policies that tend to favor Mr. and Mrs. Wall Street. And it's really not that difficult to trace through and provide evidence to that effect. Tom, thank you for those opening remarks. Okay, Steve, you're up next. You're arguing against our motion today, be it resolved. Central Banks have not adequately represented the public interests. Take us away with your opening remarks. Well, thank you, I'd for the opportunity to share my views on this important topic. I found

Thomas's comments interesting, but I think they failed, or at least didn't attempt, to identify the very important contributions that modern independent and inflation targeting central banks have made to our economic welfare. And I want to discuss three concrete benefits of our current system. First, the insulation from political pressures that are afforded by central bank independence has undeniably helped keep inflation low. That's something actually that Thomas has acknowledged in his writings on this subject. And as a result of that, I think, you know, the actions of central banks have helped to moderate fluctuations in the business cycle. And just to be more concrete about that, if you look at inflation in 2019 before the pandemic,

in some countries where the government has controlled monetary policy, policy. Turkey had 12% inflation, Argentina, 54, and Venezuela, 9,000%. So clearly, central banks run by governments don't operate too well. Second point I want to mention is that our current system of independent central banks has provided a lot of continuity of policy, even as governments change hands. And I think a great example of that is in Peru, where their incompetent President Pedro Castillo was inaugurated in 2021. He went through 67 ministers and got, you know, in the space of a year or so, and government policymaking descended into chaos. But the independent central bank, under a veteran governor there, continued to operate well and kind of kept

inflation within the range that other central banks have experienced. And the final point I want to make is that independent central banks have been able to develop very experienced and effective workforces, despite my participation in that. And this has enabled them to respond very quickly to crises such as the pandemic crisis of 2020, which, you know, through easing of policy and providing of liquidity, prevented a sharp global recession from turning into a prolonged global depression. Thank you, Steve, for that opening statement. Okay, a chance for rebuttals now. So Tom, please react to what you've just heard from Steve. We'll put another couple minutes on the program clock. Great. Well, Steve is clearly a very good debater. Right away, he's trying to

push me into a position that I'm against central banks, which I'm not. My criticism of the Federal Reserve and the central banks of Western Europe is, is, quite modest, and that's why we agreed to debate the question of adequately represent. The other thing that Steve is doing is sort of pushing the debate right away into the weeds in a way that people won't understand the big issues that are at stake and must be addressed first, and only after we've addressed those big issues, can we go into the weeds? And finally, this is something that all conservatives do in monetary policy. They'd say that anyone who's critical of the central bank is a hyperinflationist, and they start

wheeling out stories of Argentina and Zimbabwe and it's all going to collapse. And that's nonsense. There's a variety of ways of organizing and running central banks. And that's really where our debate should be about. The Argentina stuff is a distraction. It's designed to scare people into a particular position. There are a variety of ways, and I'm going to, during the course of the next 40 minutes, try and surface what those varieties are and how I differ from the conservative position. Okay, let's do it, Tom. So, Steve, your opportunity now to react to Tom's opening statement or what you've just heard? Well, first of all, I had no idea. I was such a good debater, so I thank Tom for that compliment. I also would note that I'm surprised, and I think other people,

people would be too, about what Tom refers to as weeds. Clearly, uh, establishing prolonged price stability and low inflation, uh, establishing a policy continuity, uh, particularly in the face of chaotic governments, uh, is critical, especially to development of emerging in market and developing economies, but also for the U.S. economy as well. and clearly developing, you know, experienced and conscientious and dedicated personnel in central banks that resist political pressures, those are hardly weeds.

I mean, that's at the very center of economic policy and central banking. Let me join now and just try to think up some questions that are top of mind for our listeners tuning into this conversation, who, like me, are probably, could be more informed than we are. about central banks, given their outsized kind of presence in our lives right now. And Tom, let me come to you first and start to bring further this debate on in terms of bringing out some specifics. Let's look, not that the future will get there, but let's start with, let's say, the last 10 or so years, since from the great financial crisis to now. In your opening statement, you said, and I think there are many people listening who would agree with you, that it seems that over the last decade or so there's been changes in the economy, which had 10,

to advantage the more fortunate that have tended to extenuate economic inequality. And many people have suggested that central bank monetary policy has played a role in that. Quantitative easing, the large-scale purchasing of all kinds of different assets that has seemingly elevated the values, again, of capital, which is primarily held by a smaller slice of society today than in the past. Are those the types of arguments that you're you're getting at when you're talking, Tom, about central banks not being neutral in terms of who and what they're influencing and affecting in society at this moment? Well, yes, they are. As I said, right at the beginning, we have to table some understanding of what's going on in central banks. And let me say

to what Steve just when he tried to rebut me, tried to imply that I'm against policy continuity, that I'm against having a professional central bank staff. That's not true. I would want a different form of policy. I do endorse policy continuity. I absolutely endorse professionalism at central banks. Now, the big question, which I think has to be tabled first of all,

and once we get this issue on the table, then a lot else will become clear. was the question is the sociology of central banks. Who is in charge of central banks? Who gets the set policy? And in my view, the people in charge of central banks reflect a particular set of interests. And that is the root of the problem. And I think that connects with, rudyard, with what you were trying to raise.

And in a way, it's sort of illustrated in today's debate. Steve works for the American Enterprise Institute. And he used to work for the Federal Reserve. And there's actually kind of a revolving door between places like the American Enterprise Institute, the Federal Reserve, and financial institutions like the IMF. So why is there that connection? Is it just a matter of chance? Or is there something else going on?

Okay, well, let's come to Steve on that. We'll break this up because we've got some time together. That's the beauty of this format. We don't have to rush everything into a five-minute cable interview. So to come to you, Steve, and maybe to build on Tom's conference, I mean, you could even go further and say, look at the cast of characters from Christine Lagar to Mario Draghi to Canada's Mark Carney to Janet Yellen. You now have this rotation of central bank officials in and out of active politics and back into central banking and back again. I mean,

why could or should or would you have this concentration of power amongst this really, really small group that, Steve, arguably, let's face it, they're not really that demographically representative of society as whole. They're not really accountable, except in understandably loose and arm's length ways vis-a-vis the governments that they report to. Let me actually start with the accountability issue first, and then I want to work back to the really interesting issue of like the demographic and sociological makeup of the people that work in central banks. So, First, on the accountability issue, let's keep in mind that in all central banks, right, the governor, which is what outside of the Fed refers to the leader of the central bank and the other board members, they tend to be appointed by the president or the executive. They tend to be confirmed by the legislature.

Okay. And on top of that, there are always requirements that these officials report to legislatures and the executive through reports, through testimonies. And then on top of that, in many inflation targeting central banks, there's actually a formal requirement that if they miss the targets, that they have to write a report and report that to the executive. So first, there is democratic accountability, you know, regardless of the sociological makeup of the personnel. So that's thing one. Now, I agree with Tom and, you know, that the sociological makeup of central banks, at least the ones that I'm familiar with, certainly is, tends to be on the wider side, often on, from after. often connections with the financial sector. I myself, you know, had relatively affluent parents,

went to Berkeley and then MIT for my education. So I think I'm actually relatively representative of that. And so that can't be denied. But I have to say, the folks that I worked with at the Central Bank all seemed highly dedicated to their mission. I think they're being highly well educated, you know, kind of like help them do their job better. The folks that I hung out with were very focused on making the entirety of the U.S. population,

not just the richer part, you know, more economically, you know, opportune. So I didn't, so, so, uh, I certainly didn't find an identification among them, you know, with the goals of Wall Street. But to get back to the question is, is that so what were, you know, what did they do? What were their motivations? Well, Jay Powell, right, you know, basically very rich, made his money, uh, in the financial sector. And yet he was very strongly pushing, uh, the view in the last few years that was important.

to get unemployment as low as possible in order, you know, in order to basically provide more opportunities for disadvantaged people. He, you know, a listening tour that the Fed launched throughout the country, kind of like brought a newfound understanding of how much disadvantaged populations could benefit if you really got unemployment as low as possible. So, you know, so Jay Powell's a contradiction. You know, he covered. comes from a very rich situation, made his money in Wall Street. But I think his interests at the Central Bank have been very much in not only promoting economic stability, but increasing opportunity for a lot of folks.

So, you know, go figure. Okay, Tom, let's hear you come in on this. Steve, in effect, saying here, look, it's undeniable. You can go through all kinds of different professional institutions. You can look at other parts of most advanced democracies' governments. going to be filled with, in a sense, technocrats, people who are highly educated that generally conform to a certain socioeconomic group. Central banks are no different. Well, not all technocrats are alike. I could certainly put together a different Federal

Reserve from what we have. They'd all be highly qualified, be technocratic, have PhDs from top institutions and so on. But let me go back to the question that I raised. Why are you central banks controlled by Mr. and Mrs. Wall Street and Mr. and Mrs. A.E.I. I mean, is this just a matter of chance? And I would argue that Mr. and Mrs. Wall Street are not blank sheets of paper. They have interests, and it is those interests that explain the revolving door. I mean, for instance, why this nice connection between the AEI, where Steve is at and the Federal Reserve? Well, you've got to understand what is the AEI? The American entity, the American entity, Surprise Institute was founded in 1943 in opposition to FDR's New Deal. And it's still loyal to that

basic founding moment. It's always been pretty strongly opposed to Social Security, the minimum wage, regulation, it's pro-globalization, it's pro-low taxes, it's basically pro-capital. People don't know that the, in the Federal Reserve this is, not in other countries. The only only The ownership structure actually has the regional Federal Reserve banks being owned by the private banks who are members of the system. It's been slightly changed over the years and that ownership power has been increasingly diminished. But they still are shareholders in the system and they still have a very privileged position with the system. And we actually just saw that with the failure of Silicon Valley Bank where Greg Becker, the CEO of Silicon Valley Bank, was a director of the San Francisco Federal Reserve. And he, of course, was one of the persons who lobbied very

successfully with Congress to get regulations changed that exempted his bank from certain oversight and probably contributed to the downfall of his bank. Now, I do not want to impugn the motives of the people who work in central banks. They are educated, and I think they are dedicated, and I think they are acting in what they believe is in the public interest. But we have to realize that people differ, they bring to the table their political interests, what we might call their prejudices. They bring to the table their point of view about the world. And those who are at the Federal Reserve table have a point of view about the world that is pro-capital.

And that's why this is what this revolving door is so important. Okay, well, let me come back to Steve on this point then and maybe just boil it down to something very simple for our listening audience. Steve, do you think central banks have played a role in the exacerbation of economic inequality? I think the short answer is, I'm not sure. Let me, yeah, so I'm sorry to give you such a mealy-mouthed answer, but now let me give you a two-handed answer to that question. And to the extent that people accuse central banks of exacerbating inequality, well, a lot of the discussion, Tom may have other points, focuses on the role of the Fed and other central banks and purchasing assets, so-called quantitative easing after the 2008 global financial crisis. And the view is, well, the way that the Fed responds to crises is by buying a lot of assets, lowering interest rates. That has led, you know, the wealthy to benefit because they're the ones that tend to own stock and other assets.

It's $9 trillion, is that roughly? So that's a lot of assets over a decade and a bit. Absolutely. And if you owned assets, if you owned assets going into that period, and many Americans don't own assets, right? There's a large, maybe Tom can talk about that later. It's a large portion of the American population that effectively has no savings, no stocks, no bonds, maybe doesn't even have a pension plan. Right. So the argument there is that by buying all those assets and pushing up their prices, the Fed helped the wealthy and increased wealth inequality.

All right. So let me be clear that within the Fed and outside it, That's been a subject of real debate. Okay. And the source of the debate is the following. Okay. After the global financial crisis, it took a long time for the U.S. and other advanced economies to recover. It took a long time for unemployment to come down.

And there was a real debate over how to address that. Because on the one hand, the QE might exacerbate wealth inequality. But on the other hand, the only way. that the central bank knows how to get the economy moving and to help the most disadvantaged sectors of society is by providing monetary stimulus. And so basically on the one hand, QE may exacerbate wealth inequality by pushing up prices of assets. But on the other hand, by lowering interest rates and facilitating investment, it gets the economy moving and that helps workers. And the And the data show that the lower the unemployment rate tends to get, the more, the most disadvantaged members of society benefit.

So there was a debate in the Fed. There's been a debate outside the Fed. And it's an unresolved issue. So that's why I responded to your question by saying, I don't know. So Tom, where do you come down on this? This is a no-brainer. The Federal Reserve has absolutely, and central banks have absolutely been a core component of the rise in income and wealth inequality over the last 40 years. And, you know, you have to, when you look at policy, you have to look, the policy picture changes over time with changing conditions. And so that's how we have to look and discuss the Federal Reserve. I would take the story back to the 1980s, where the Fed was focused very much on unemployment and

inflation and ran a much, much higher real interest rate, which hurt people and a much higher rate of unemployment. And that was the focus of Mr. and Mrs. Wall Street at that time. And it hurt working people. It's part of the de-industrialization of America. It was part of the beginning of the asset price boom. High interest rates, as you say, who owns the bonds? Who gets the interest payments? It's not working people. They're the ones who are making it. Then in the 1990s, You look at the Fed, the focus changes because the 1990s are different from the 1980s. And so we get more a little bit of a move away from inflation, unemployment, a little bit more of a concern with less of a concern with having a high rate of unemployment, a willingness to test bringing

the unemployment rate down. And of course, capital likes that too. Capital does not want to tank the economy. It wants to run the economy at a particular speed that suits its interests. And that's where one of the core points. And in the 1990s, what you also see with the Federal Reserve, it's really going to be gung-ho for financial deregulation. And then we can move to the 2000s,

and we do begin to get into the moment that Steve was just talking about. We had this massive asset price bubble in the Bush-Cheney presidency that then collapsed in 2006, 2007, and then morphed into the great financial crisis. I think the Federal Reserve is very responsible for that. We have a sort of asset price populism going on. Wall Street is benefiting tremendously from there. So as we're just moving towards the end of this debate,

I want to just try to get and focus a little bit more in just the average listener tuning in to what's happening right now. So right now we've gone through this exceptional period, the fastest rate hikes in really modern monetary kind of history. the recent period. And Steve, those hikes are causing arguably a lot of pain, or they will be, as the delayed effects of them begin to build within the economy. That's the idea. They're trying to match supply and demand, and the central bank can't create more supply, so it has to kind of lower demand. And I guess, Steve, I want to hear a little bit about more about how fairness

kind of works into the central banks thinking about that because the, you know, an impartial observer or someone from the outside looking in might say, wow, that sounds like it's going to be really tough for workers. That sounds like you're, in a sense, pushing up unemployment purposefully to lower demand, to cool the economy. It's kind of like doing heart surgery with a meat cleaver. And to what extent, you know, again, could there be another way to do this? Or is this like the least of a series of bad alternatives? Right. Well, first I want to note just to kind of frame the issue that to the extent that we're debating a premise, the premise we're debating is not that all Fed decisions are correct at all times.

So the Fed could be overtightening at the moment, but that doesn't necessarily kind of like invalidate, you know, the basic appropriateness of our setup. But moving on to where we're at, I think that the way you've posed the issue in terms of don't the Fed's rate hikes lead to the risk of dire recession that hurts the most underprivileged parts of our society is a little bit one-sided because what the Fed is responding to is the highest rates of inflation since the early 1980s. And those are rates of inflation that have clearly bit into the purchasing power of workers' incomes. And there's a great number of people, especially elderly folks on fixed income, that are getting particularly hurt, you know, by the surge in inflation.

And then finally, I don't think that the Fed should make its decisions, kind of like solely in response to kind of like, you know, the winds of public opinion and politics. But I think that, you know, a huge majority of the American people are very much, you know, discomfited by the rate of inflation. at a time when the unemployment rate is at historically very low levels. So the point here is that it makes sense to raise rates in order to contain inflation, and it makes sense even to risk the possibility of a mild recession in order to avert what I think almost everybody agrees is something. well worth avoiding, which is the risk of a 1970s style stagnation. All that said, the Fed is in deference to the fact it's already raised rates a lot, I think clearly starting to ease its pace of tightening.

And, you know, I wouldn't be surprised if it didn't tighten again for a while or if May was the last hike and that after some time the Fed will start lowering rates again. So I think it's very cognizant of the risk of recession. And it's very cognizant about the problem being posed by, you know, Silicon Valley Bank and the banking issues. And it's trying to balance these two objectives. Thanks, Steve. Okay, Tom, we're going to give you the last word before we go to closing statements. And that's just to address this question of, okay, if you want reform, surely that has risks. You're talking about changing a system, which, you know, again, we acknowledge for better or worse, has existed now in place with the sociology and the dynamics and the culture that we know that it's had.

And if we change that, what suddenly is in play? I don't agree that there are the risks, the massive risks that you say, the type of changes that I'm proposing very much fit within the existing system and might almost be called marginal from that point of view. I'll discuss those in a minute. But I do want to just back up a little bit here to say that actually Steve may be surprised that I kind of agree with him on some of the stuff he's just said about the current round of interest rate tightening. I like to distinguish between the decision to raise rates and then how much rates should go up. And I think the decision to raise rates was absolutely right. In fact, the Fed was clearly behind the curve. And I'm kind of a bit of a

pariah with my progressive friends who had not wanted to raise rates at all. I've going back to 2011, I wrote an op-ed in the Financial Times that said, no, we don't want to go to zero interest rates. We definitely don't want negative interest rates. I would have parked the interest rate at 1% then, and kind of, you don't want to push monetary policy into crazy places because it produces crazy behavior. You don't get much bang for buck at the very end. You get asset price inflation and not much real economic gain. And this has been a big problem in Washington, and it's been Mr. and Mrs. Wall Street, as well as Mr. and Mrs. Progressive. getting it wrong. Now, so we were behind the curve raising rates, but now we're going too far.

We're pushing too fast. I think we've gone. We're really at the cliff's edge now. And I also agree. I think the Fed is beginning to smell the salt water below the cliff and maybe about to back off. Now, the question is, why did they go so high? And that's because this is Mr. and Mrs. Wall Street in charge. They have this 2% inflation target, which I think is too low. And they're willing to kill labor to get there. And that's where you begin to get this class interest stuff that we were talking right at the beginning. They've pushed too fast, too far. They were slow, and then they hit the pedal so hard that they've gotten ahead of where they should be.

That would be my assessment of the current moment. And by the way, when Steve talks about a risk of a 1970s-style inflation, this is nonsense. We don't have the same pattern of labor relations, the same bargaining power. We don't have OPEG breathing down our neck in the way that we did. We don't have the same commodity price shocks of the same scale, the same dependence on resources that we were then, were a much less resource-dependent economy within that we are. Thank you, Tom.

You've been listening to our debate today, be it resolved central banks have not adequately represented the public interest. Okay, let's go to closing statements, gentlemen. And I'm going to come to you first, Steve. sum up this debate for us. What are the key points, ideas that you want to leave our audience with? Thank you, Rudyard, for this, and I've very much enjoyed our conversation. I want to close at a kind of a higher level and say that we're really at a very challenging time here, both for the United States and I think for Western democracies more generally.

Our politics and our Congress are almost dysfunctional, they're split bipartisan animosities and cultural wars. There's a widespread distrust and skepticism of institutions, especially government. And aside from that, we face concrete challenges in the form of high inflation, inequality, climate change, and financial instability, to just name a few. So to face these challenges and rebuild trust in our institutions, it's really critical that the agencies of government combine political accountability with math, maximum experience, expertise, and effectiveness.

And in the monetary policy sphere, I think this bill should be filled by independent central banks, whose leadership is appointed by elected officials and who regularly report to those officials. And in large part, owing to their insulation for political pressures, independent central banks around the world have a proven record of getting inflation low, which is all the more important at the present time, as they struggle to address the global inflationary surge that followed the pandemic. These central banks also have a record of acting swiftly to restore financial stability in the face of disruptive shocks like in 2008 and 2020. And finally, because they're insulated from political pressure and as a related manner, they have deep reserves of

experience and expertise. Independent central banks provide critical policy continuity in the face of what have been some pretty abrupt shifts in government stances and strategies. So to be sure, central banks make mistakes, as everyone does. And I would certainly agree with Thomas that there's room for changes and reforms at the margin. But radical changes that would subject central banks to the whims of politician, I don't think would be in the interests of citizens, the economy, or democracy. Thank you. Thank you, Steve, for that closing statement. Okay, Tom, we are going to give you the last word in our debate today, be it resolved central banks have not adequately represented the public interest. Bring home this conversation for us. Well, thanks for inviting me and thanks, Steve, for being such a nice and pleasant debater. It's been a real pleasure. The first point that I would really emphasize that listeners take away from this podcast

is that the sociology of central banks matters. Who controls them? Who governs matters? The people at the table bring a point of view to the table, and that has an influence on the policy outcomes. And in a sense, that's the root cause of the issues that we've been debating here. those people are not interested in tanking the economy. Those people are even dedicated and consider themselves benevolent.

I don't want to claim that I have some superior moral high ground. But because they bring a particular interest, the interest of Wall Street and the AEI to the table, they end up not adequately representing the public interest. That's crucial to sociology. Yes, of course we have to have professional central banks. The central banks have to be accountable, and there has to be policy continuity. That would all be part of the institutional framework that I would put in place.

But we need to change the overall structure of how we do central banking. And I see central banks as having two problems to deal with. One problem is they need to guide the macro economy to help us find a low inflation full employment. And the other problem they have to do is they have to prevent financial instability. And that means you have two goals. There's a very fundamental theorem in economics, the Tinbergan theorem. If you've got two goals, you need two instruments. And that's what we've not pursued, and that's what we need.

So we need to use the interest rate, that's the prime macroeconomic tool of the central bank, to guide the economy towards full employment. And then we get a bit of a debate about what is full employment. the Federal Reserve has settled on a 2% inflation rate, and I say that's going to leave you short of full employment most of the time. According to my thinking, I recommend what I call the minimum unemployment rate of inflation. Look for the rate of inflation that will yield a stable rate of inflation that will yield a minimum unemployment, and I think that's probably somewhere between 3% and 5%. And that's where I would like to see us recalibrate the inflation.

inflation target for the economy, but I've also long advocated something called asset-based reserve requirements, where you move the reserve requirement from deposits, which are insured anyway, and place the reserve requirement on assets. And the reserve requirement can then vary by asset type, can vary according to how frothy each particular asset market is, and you want to stop speculation in the property market, which is driving house prices too high, which is not good for ordinary people. So I think there is a very responsible middle out there, but it's not getting heard. And generally, coming to our political situation, the middle is being squeezed in our political debate. Thank you, Tom, for that closing statement. And thank you, Steve, for participating

in this debate. I've certainly learned a lot. It's a complicated weighty. It's a sometimes heady subject, central banks and their roles in our economy, in our lives, but both of you have brought real clarity and more importantly, civility and substance to this conversation. So on behalf of the Monk Debates community, thank you so much for being part of our discussion today. Well, that wraps up our debate today. I want to thank our participants, Thomas Pally, and Steve Kamen. If you have feedback or reflections on what you've just heard, please leave us an email at podcast at monkdebates.com. That's MUNK DebateswithanS.com.

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