Is Central Bank Independence All It’s Cracked up to Be?

Alan Greenspan attained an almost iconic status as Governor of the Federal Reserve Board. So, as his term draws to a close and his mantle of infallibility is passed on to his successor, it is worth examining whether his legacy will measure up and what we can expect from the new Fed chief, Ben Bernanke.

Few central bank governors have the kind of hagiography lavished upon them, especially in their lifetime, that Greenspan has had. But what makes for a great central bank governor in our modern societies, great institutions or great individuals?

In economics, we seldom have a clearly defined counterfactual: Would the economy have performed even better or a little differently if someone else had been at the helm? We can’t know, but there is little doubt that those “managing” the economy receive more credit than they deserve, if sometimes less blame.

Many forces behind the boom of the 1990’s, including advances in technology, were set in motion before Bill Clinton took office (just as the legacy of President George W. Bush’s deficits will be felt long after he leaves). So Greenspan cannot be given credit for the boom. But, while no central bank governor can ensure economic prosperity, mismanagement can cause enormous harm. Many of America’s post-World War II recessions were caused by the Fed hiking interest rates too fast and too far.