· Conflictive self-reference: Clearly, one can conceive the situation that the Bank announces a policy while the true scientific forecast shows that the policy is untenable and will be repealed later. Hence there is an internal source of conflict - the worst kind, not a dysfunctional person, but a logical knot.
· General conflict of interests: The Central Bank may not only have the objective to control inflation but also other objectives, like for example supporting and supervising the financial system. For example, the US Fed is not purely a governmental body, but it is rooted in the financial system and it is influenced by private interests therein. See Galbraith (1998:221-231) for a discussion on the conflict of interests - for example on the ‘credit crunch’ - and read also Krugman on the Savings & Loans debacle.
Hence, along the ‘TP & ESC’ line of argumentation, we can clearly see a need for reform in existing Central Banking, and the direction that it would need to take. Interestingly, where economic policy of the state would have to be co-ordinated with the policy of the Central Bank (that should best remain independent), there arise questions of structure and priority. My suggestion is to first create the Economic Supreme Court, and have it advise on how to position the Bank or its separate functions.
About the US Council of Economic Advisers
This appendix consists of two large quotes from the White House internet site in January 2000, with my comments added.
From the “Employment Act of 1946”
“There is hereby created in the Executive Office of the President a Council of Economic Advisers (hereinafter called the “Council”). The Council shall be composed of three members who shall be appointed by the President, by and with the advice and consent of the Senate, and each of whom shall be a person who, as a result of his training, experience, and attainments, is exceptionally qualified to analyze and interpret economic developments, to appraise programs and activities of the Government in the light of the policy declared in section 2, and to formulate and recommend national economic policy to promote employment, production, and purchasing power under free competitive enterprise.
It shall be the duty and function of the Council--
1. to assist and advise the President in the preparation of the Economic Report;
2. to gather timely and authoritative information concerning economic developments and economic trends, both current and prospective, to analyze and interpret such information in the light of the policy declared in section 2 for the purpose of determining whether such developments and trends are interfering, or are likely to interfere, with the achievement of such policy, and to compile and submit to the President studies relating to such developments and trends;