The debate about inflation targeting in South Africa has once again raised the question about the role of the South African Reserve Bank (SARB) in the South African economy. The independence of the SARB is enshrined in the South African Constitution.
What does this independence mean? It is supposed to mean that the SARB focuses on ensuring financial stability, without inter- ference from government. Many commentators have questioned the independence of central banks over the past century. The independence provides the governor of the bank and senior management with a huge amount of power without requiring public accountability from these officials.
They are appointed, not elected, and most of their operations are not transparent to the public. The role of central banks and what independence means are not an issue only in South Africa, but have, once again, emerged as a result of the global financial crisis, huge bail-outs and the use of low interest rates to stimulate economies.
The US Federal Reserve (the Fed) injected billions of dollars into banks to reduce the harmful impact of the financial crisis. The Fed is facing greater scrutiny from elected US officials because they have suddenly realised its power. The US Fed has printed billions of dollars to bail out the banks. Many in the US Congress are demanding greater transparency of the Fed.
There is a move by more than 250 members of the house to get an independent audit of the Fed’s accounts. Nancy Pelosi, the speaker, recently commented that the Fed was able to hand out public money without having to take into account public decision-making. Pelosi commented: “All of a sudden, we wake up one morning and AIG was receiving $80-billion from the Fed. So, of course, we’re saying, ‘Where is this money coming from?’”
Prominent US author William Greider wrote an excellent book on the US Fed, called Secrets of the Temple, which was published in 1989. Greider explains that the Fed deliber- ately keeps its operations nontransparent. He further argues that independence from government influence does not mean that the Fed is not influenced. He talks about the close relationship between private financial institutions and the Fed.
In their roles as overseer and regulator of banks and other financial institutions, the US Fed and the SARB would develop a close relationship with the people working in these financial institutions. They would be more likely to hear the ideas and opinions of bankers than those of other members of society.
Alan Greenspan, the famous former chairperson of the US Fed, had many beliefs about the role of the financial sector that were very close to those of the leaders of the financial sector. Greenspan was an outspoken advocate of self-regulation of the financial sector and was against State regulation of derivatives.
Green- span recently had to admit that the financial crisis had forced him to rethink his ideas on the efficiency of the financial sector. The Fed has had to print billions of dollars to bail out financial institutions because of a crisis caused by inadequate financial regulation.
When the issue of an audit came up, the response of current Fed chairperson Bernard Bernanke to the US Congress was that an audit of the Fed would be tantamount to “a takeover of monetary policy by Congress”. In other words, the US Congress, which created the US Fed, should not be allowed to take a close look at the Fed’s business.
The question we all have to ask ourselves about central bank independence is: Who protects us from central banks? The SARB’s financial accounts are subject to public audits, but this level of transparency is not enough. It seems that, by giving the SARB independence, we have forfeited our democratic right to understand and influence some of the most important economic decisions made in our country. It also seems that forfeiting this democratic right allows people managing large financial institutions more power to influence the SARB than the rest of us.