Buttonwood's notebook

SOMETIMES events seem to develop their own momentum. In Europe, we have the spectacle of countries in the euro-zone, which was set up with a "no bailout clause", appearing to insist on a fiscal rescue for Ireland, which insists it doesn't want to be rescued!

Everybody has their own agenda in this battle, with the Europeans worried about the contagion effect, the Irish government concerned about electoral humiliation, a potential battle over the low Irish corporate tax rate, not to mention the close links between the British banks and the Irish economy. 

But we are talking about cobbling together a temproary solution to the sovereign debt problem and I get the feeling that events may overwhelm the authorities.

Meanwhile, in the US, we have some public opposition to the Fed's QE programme, in the form of an open letter to Ben Bernanke. Some will see this as a purely right-wing attack, based on signatories such as William Kristol and Amity Shlaes. But there are some interesting thinkers in the group, including Niall Ferguson, James Grant and the hedge fund managers, Cliff Asness and Jim Chanos. Paul Krugman is dismissive of the group as an anti-Obama, anti-government cabal which seems a little too sweeping.

But I think it's important to put this in a historical context. There is a very long-standing anti-central bank sentiment in the US, dating back to Thomas Jefferson and Andrew Jackson. Both Jefferson and Jackson were worried about the ability of a central bank to act as a rival to government power. In terms of economic policy, however, they were not in agreement; Jefferson was a serial debtor but Jackson was more of a sound money man. J K Galbraith wrote in Money that:

Had Andrew Jackson succeeded in establishing the hard money that he believed himself to want, his name would have been reviled by the small, energetic and aspiring folk of the frontier.

The farmers who rallied behind William Jennings Bryan in 1896 were suspicious of the money power and might have shared the religious attitudes of the tea partiers, but they wanted loose money in the form of silver coinage. Now we have a popular movement against the loose money policies of a central bank, an interesting development.

Again, I get the feeling that we are approaching the end of an era. Independent central banks appeared to solve the problem of defeating inflation, but there was always a democratic issue. We have now reached the stage when central banks are being asked to do things that politicians know that the electrorate would not be willing to support, a trend that arguably goes back to the Mexican bailout of the mid-1990s. It does not seem sustainable.