Michael Hlinka: We should replace the Bank of Canada with a computer
- September 4, 2008 7:17 AM |
- By Michael Hlinka
Money Talks is a daily business column from CBC radio.
To the surprise of many - including me - the Bank of Canada left the Bank Rate unchanged yesterday morning. In fact, when you read the text of the Bank's announcement, the decision becomes borderline inexplicable.
They themselves admit that overall economic activity is now lower than they expected when they met in July - when rates were also held at this level - and that inflation will also likely be lower than previously thought in the months to come. The logical conclusion is that conditions are weakening, marginally, and because there tends to be a lag between instituting policy and its impact being felt, the Bank should have acted to get ahead of the economic curve.
Or should it?
There is a compelling argument - introduced years ago by Nobel-winning Economist Milton Friedman - that activist monetary policy does more harm than good. By activist monetary policy I mean the following: The Central Bank's ability to lower or raise interest rates, thereby influencing over-all economic activity.
Traditional theory and conventional thinking agree that a Central Bank should have this discretionary power. Friedman disagreed. He believed that for a variety of reasons more harm than good was accomplished. It politicized the Central Bank, making it a tool of the Federal Government. And because of the lag between instituting policy and its impact being felt, changing interest rates could actually hurt the economy more than help it.
So what's the alternative?
It's actually quite simple - just leave the Bank Rate unchanged and constant. Let's go back to Milton Friedman. He argued very persuasively that the Federal Reserve, which is the U. S. equivalent to the Bank of Canada, should be "abolished" and replaced with a computer. That computer would grow the money supply at the same rate that the economy grows… just that simple. Therefore, we'd never again see inflation or asset bubbles caused by too much money being pumped into the system to artificially stimulate growth.
And we wouldn't go through yesterday's drama, where the markets try to anticipate what institutions like the Bank of Canada will do in order to profit from it. Because when you think about for a moment … what are interest rates, anyway? An indication of what money costs. Nothing more and not less.
We would find it totally unacceptable if any central authority artificially limited the wages we make. As much as fluctuating prices for products like gasoline and bread frustrate us in the short run, there's a wide-spread consensus that market forces are the best and fairest way to determine what those things should cost. Money should be no different.
Milton Friedman was right: We should abolish the Bank of Canada and replace it with a computer. Then we'd know that interest rates would be steady and constant… and so would be economic growth!
- Andrew Wahl (19)
- Andrew Willis (13)
- Bob LeDrew (10)
- Dan Noel (1)
- David Baskin (18)
- David Berman (1)
- David Colman (14)
- Deborah Yedlin (29)
- Duncan Stewart (29)
- Ellen Roseman (90)
- Jacqueline Drew (10)
- Jim Bray (25)
- Jim Jubak (6)
- John Gilchrist (4)
- Kelly VanBuskirk (6)
- Kira Vermond (73)
- Loraleigh Kovacik (9)
- Michael Hlinka (183)
- Peter Vincent (16)
- Pierre Battah (1)
- Todd Hirsch (1)
All News blogs
- Kira Vermond: Resolutions for Work
- New Year, new you. At least that's what you're shooting for in 2012 at your workplace. This is the year that you're going to ditch your wallflower ways, speak up in meetings and take the initiative.... Continue reading this post
- Ellen Roseman: Air Miles-Use them or lose them!
- If you're collecting Air Miles, you now have only five years to use them. And if you don't redeem in time, you'll lose them.... Continue reading this post