Scissors Require Two Blades: Central Bank Independence with (Principled) Central Bank Allocation

Abstract

I critique the contemporary doctrine of central bank independence and its implicit correlate, the dogma that central banks can and must engage only in what I call credit modulation without engaging in what I call credit allocation. This thought-complex is wrong-headed as to both premise and conclusion. The premise is faulty in that macro-allocation in favor of productive as distinguished from merely speculative credit flows is no more difficult to manage, technically and politically, than is the distinction between modulation and allocation itself. The conclusion is faulty both for its grounding in a false premise and for its overlooking that sound modulation is impossible without sound allocation. This impossibility is in turn rooted in the nature of endogenous Wicksellian credit-money, which through the dynamics of what I call recursive collective action problems inevitably fuels inescapable bubbles and busts. Privately ordered production, I conclude, requires publicly ordered finance.