It is a chart that trumpets monetary resolve and success—and yet also a chart that suggests that a page is turning in central bank annals, and new constraints and challenges may become, if not the norm, then commonplace.

The chart is of long-term interest rates, in the major Western economies around the world, from 1991 to present. They sink across the years and then the decades, unsteadily yet remorselessly or favorably down, depending upon how the investor is situated. Of course, in general, lower interest rates are good, signaling less-expensive capital for business expansion, and granting relief to homebuyers and borrowers of all stripes.

And, as Milton Friedman pointed out, low interest rates are a sign of tight money and that investors expect tight money.

With capital abundant and interest rates so low, business should be booming in a global economic hothouse. Instead, the word “bust” is more often heard. Japan is in a perma-gloom, Europe is sinking into a quagmire, and the United States is spinning its wheels.

In many regards, the secular decline in interest rates is a tribute to the global war on inflation, a war won long ago in Japan. The spoils of victory, however—as generals or perhaps more particularly, soldiers, have discovered so many times in so many places before—are not as sweet as thought, and perhaps even are becoming Pyrrhic.

Moreover—again, just as field marshals have discovered before—with victory comes responsibility. Central banks “own” this victory, as it results from their tireless (and even zealous) commitment to extinguishing inflation, or at least bringing it down.

So now, having won the war, central banks own the territory—they cannot claim it is for others to assume command. Far from it. If central banks at this time abdicate, then the putative advantages of central bank independence are a cruel chimera.

Indeed, just as central banks led the way in beating inflation, so they must now lead the way to prosperity in global environment of low inflation and widespread “zero bound”—meaning most major institutional interest rates are close to zero or headed that way.

It will be a challenge for central banks and for central bank culture. The conventional central bank weapon for economic stimulus—lower interest rates—is as useless as a fire-hose against a tsunami. Yet Western economies are badly in need of a boost. Across the continents there is feeble demand, unused industrial capacity, thick ranks of unemployed.

As we know from Japan, central banks can go to zero bound for decades, sans meaningful results. Indeed results can be miserable.

If nothing else, if only by default, central banks now advance into recessionary battlefield duties with but one major stimulative weapon, and that is quantitative easing (QE). At best, quantitative easing is deployed within a comprehensive package of monetary policy tools that has been dubbed “Market Monetarism”.

To be sure, nearly all economists favor lower taxes and less invasive regulations whenever possible—the much-reviled “structural impediments” that are alleged by some to be holding back global economies today. Yet, in general, developed economies flourished in the two decades leading up to 2008, structural impediments and all.

Moreover, Japan has instituted structural reforms since 1992, by some accounts devastating their mom-and-pop retail segment and wiping out the “employee for life” norm of their nation. The reforms were successful, although often had the unsettling effect of lowering business costs, and thus consequent prices in an already deflationary environment. Still, robust economic growth did not result; indeed the only sustained growth in Japan was from 2002 to 2006, coincident with their timid QE program.

The real point is that without monetary expansionism, structural reforms can only accomplish so much. Would that the United States could wipe out its ethanol program, eliminate jobless benefits, cut defense spending, open the borders to immigrants, halt federal rural subsidies, crush the home mortgage interest tax deduction and then watch the economy boom. Would it? And what is the political feasibility of that happening? If such reforms never happen, then central bank authorities are within their proper province to stand idly by and moralize?

Even with structural reforms, economic good times won’t happen as long as the Federal Reserve is asphyxiating the economy (as the Bank of Japan and European Central Bank have discovered), and those structural reforms are unlikely anyway.

Perma-QE?

Monetizing the debt is about as popular with most economists as polygamy or animal cruelty. It remains (in most economist’s minds) one of the most sordid of cardinal sins monetary authorities can undertake. A politicized central bank is a sure path to escalating currency debasement, and then necessarily subsequent rampant social perversions, up to and including Nazism. One imagines that central bankers monetizing debt first chant solemnly in subterranean Satanic rituals seeking doom for all aboveground.

That the United States Federal Reserve might engage in stimulus for political reasons has been a recurring theme of the Republican Party in 2012, up to and including comments by GOP president candidate Perry, Governor of Texas, who suggested that such stimulus would be treason (and thus grounds to execute Ben Bernanke). The Fed Chief, in submitting to questions put to him by GOP Congressmen, is ever batting away suggestions that he is trying to stimulate the economy unduly in a recessionary election year, notwithstanding that he was appointed first by GOP President George W. Bush.

Of course, the reality of QE and monetizing the debt can be much more mundane and earthly, as was discovered in Japan. After five years of QE starting in 2001, Japan’s economy had improved, but inflation was still dead. And in the United States, two rounds of QE also coincided with improvement in the economy, while inflation remained at historic lows. So far, the use of QE in zero-bound or near zero environments has been almost completely benign.

For those obsessed with the U.S. dollar and gold prices, the United States’ rounds of QE (the Fed in 2012 had a balance sheet of more than $2 trillion) must have been supremely puzzling; gold prices cracked almost coincident to the deployment of the Fed’s QE program.

All of which raises a questions that still will be regarded as profane by most economists: What if central banks make QE, and monetizing the debt—or at least escalating central bank balance sheets of various securities—a normal course of conduct? The question may irk the orthodox, but if the zero bound becomes the norm or commonplace (as it appears to be, based on the direction of interest rates for the last 20 years), then being irked will be the least of our problems.

Perma-QE, But How Executed?

Central banks now face a choice of what kinds of securities to buy. Some economists favor the buying of only domestic government bonds, while others favor a mix of securities, or even a basket weighted towards riskier securities, or securities tied to the housing market such as residential mortgage-backed securities.

Whatever the securities or assets purchased, central banks balance sheets will swell, and in the case of the Federal Reserve Board, generate more free cash flow, or profit, than by any other entity in history.

In just two years (2010-11) the U.S. Federal Reserve Board generated profits of $158.6 billion dollars, and that by hardly trying. Add on 2009’s $46.1 billion, and you have $204.5 billion in profit in a three year period. This is serious money.

Many thought the Fed’s smallish QE program should be larger and more sustained—indeed, many critics contend Federal Chairman Bernanke seemed to aiming for the smallest QE program that might just barely nudge the economy out of outright deflation and recession, rather than an aggressive plan aimed at robust growth. Bernanke’s reasoning and programs remain a mystery to many, and many thus suppose he is leading by consensus, and thus deferring much to “inflation hawks” within the institution, who have been raising the specter of runaway inflation since the first consideration of Fed QE (and even before that).

But if trends to lower global interest rates are secular and sustained, QE is the default option, and it is easy to see that central banks in the future night have hundreds of billions of dollars in profits, and trillions in assets, that could be owned by citizens for the long-term, or even until maturation.

So what is the best disposal or use of such assets for the economy, and what is proper and responsible in democratic societies? Does “independence” of central banks—an axiom among most economists—make sense in democracies, when so much public cash is at stake? Cash that could alter tax policies?

When Orthodoxy Becomes Dogma?

That central banks, even in democracies, should be “independent” is one of the most durable and accepted maxims of modern economics. But, upon reflection, and based upon recent performance, there may be reasons enough to re-examine this axiom. There are several reasons.

Central bank independence is undemocratic. Public organizations always need oversight, and accountability. Even with democratic checks, public organizations—never the victims of creative destructionism—tend to become devoted to internal goals and standards, not goals and standards the public needs. Insularity Is Not Generating Stellar Performance. Insularity Often Equals Elitism.

Macroeconomic Policy and Democracy

That in democracies the voting public—or its elected representatives–cannot be trusted or permitted to directly control monetary policy seems to have become a norm within the economics profession. The fear is that the public will make bad choices, and possibly select an inflationary or deflationary course. The risks are that the public will leap at the temporary prosperity of monetary expansionism (at the expense of longer term inflation warned of by wiser counsel), or fall prey to gold nuts and monetary contractionists.

The stance that central banks should be independent hardly withstands comparative scrutiny—for example, in democracies, the voting public selects leadership for military agencies. Certainly the lethal arsenal of the United States Defense Department poses more potential threat to mankind than Federal Reserve Board policy. And voting publics are susceptible to fear-mongering, jingoism, indifference and many other maladies when it comes to national and global security issues. Indeed, many in the Republican Party accused Democratic President Bill Clinton of engaging in military theatrics to distract voters at various points of his presidency, while others suspect the histrionics after 9/11 (the 2001 terrorist attack on New York City), and even subsequent wars, were also driven more by domestic political concerns than real need.

(If readers will allow a digression, it is forgotten today that the American public and United States Congress did not want entry in World War II, despite the exhortations of President Franklin Delano Roosevelt, even as unspeakable atrocities were mounting for years upon years in the Pacific and in Europe. Only after the Japanese bombed Pearl Harbor could FDR declare war on Japan—and even then, FDR worried he could not bring his nation into the European theater. Nazi Germany solved that problem by unilaterally declaring war on the United States four days after the Japanese attack on Hawaii. It is frightening to consider the catastrophe for the United States and the world had not Japan and Germany so unwisely forced the United States into the global conflict, against the wishes of the American people and Congress. Yet no one suggest the United States should have an independent National Security and International Relations Board, that determines when and where the nation actually enters war.)

Similarly, in most democratic nations, important fiscal and regulatory policies are not thought above the reach of ordinary politics and elections. That monetary policy is somehow sui generis becomes an even more difficult case to make.

The long history of public agencies in most democracies (and even more so in authoritarian nations) is towards self-serving ends, even when there is a modicum of oversight and accountability. To reduce oversight and accountability on any public agency is to beg for abuse.

Public agencies, unable to point to market-place success as reason enough for their existence, tend to generate missions expressed in the most exalted terms, while ever gravitating towards self-serving standards and goals. Indeed, soon goals and standards will appear that are either easily met (thus allowing agencies to crow about success) and that can never be met, thus requiring a permanent agency (In the United States, such missions as the War on Poverty, the War on Drugs, the Global War on Terror come to mind).

Moreover, as seen recently in Europe, the citizenry may indulge in just anger at macroeconomic policies that upturn or better their lives, but over which they have little or no influence. How is the public to vote on the monetary policy of the ECB, The Federal Reserve Board, or the Bank of Japan? Who is responsible or accountable for monetary policy?

An interesting question: Would the aforesaid monetary authorities have pursued such rigid inflation-fighting stances from 2008 onward had the public been able to vote them out of office? Would the Japanese public choose 20 years of deflation and very slow growth? Or, could Bank of Japan monetary authorities hold office if they were not independent under the 1997 Bank of Japan Act?

A Forgotten Event

The idea of placing a central bank within a nation’s treasury department today is jarring, almost alien, and even forbidden. Yet it was not always so. In December of 1984, then-Treasury Secretary Don Regan, of the Reagan Administration, issued a call to place some Fed powers within the Treasury Department. Regan, and the Reagan Administration, were angered that the Federal Reserve, then the province of Chairman Paul Volcker, was following a “tight money” path. The Reagnauts badly wanted growth—indeed, in this same time frame, the Wall Street Journal ran an editorial suggesting Volcker should ease up. Inflation was then running at four percent to five percent. Regan’s suggestions soon sank back into the immutable mire that is institutional Washington, D.C., where the perennial task of reforming federal agencies is ever thwarted. The Federal Reserve remained independent. Largely forgotten today is that the Fed was a creature of the Treasury through World War II, and up through 1951. In a1951 Accord, the Fed won a measure of independence, which since has become institutionalized. The accord specifically mentioned that the “monetization” of federal debt should be minimized.

Insularity and Elitism

Of course, insularity in public organizations nearly always ultimately results in indifference, often trending to inbreeding and elitism—dangerous attributes for public agencies in any country, and repulsive in democracies.

In the United States, the Federal Reserve has long sought to be opaque, resisting even such obviously democratic minimums as releasing minutes of board meetings, as if such matters were beyond the purview of the voting public or its elected representatives. As it stands, the American public must wait six weeks to find out what board members were contemplating when they met.

Citizens the world over know of the complacency or worse that can define any organization that falls outside private-sector market forces. Shorn of the need to satisfy or please paying customers, public organization often arrange to define success by standards that are easily met, usually in exalted terms. Central banks, for example, may select single criteria—such as low or zero inflation—as the goal they should meet, and then they can wage brave war on that front alone, usually accompanied by much pompous pettifogging on the dangers of irresolute leadership on this sole score.

Other concerns, such as robust economic output or deleveraging of onerous national debts, are shoved outside central bank walls.

It is remarkable that the very people who hold that monetary policy is so vital to robust economic growth should then absolve themselves of any responsibility to assure the same, and are never able to accept blame for dire economic contractions.

To be sure, there are dangers associated with placing central banks within the scope of elected national governments, and also with monetizing debts through QE. Surely, elected representatives could abuse the power to print money, to reward friends or finance government outlays best done so by taxes.

It can be hoped that adherence to Market Monetarism principles would obviate the need for such actions, and may decrease the need to reevaluate central bank independence. Yet the aforementioned issues stand unaddressed, and the failures of central bank independence are becoming more manifest with each year that passes.