It is therefore important that the authorities do not sow doubt, but on the contrary pursue a longterm and predictable policy. The authorities must be credible and inspire confidence. There must be consistency between the stated objectives of economic policy and what is actually done to achieve these objectives. This is the most important reason why the conduct of monetary policy has been delegated to the central bank in Norway, as is the case in other comparable countries. The question of central bank independence is not new. When Norges Bank was established almost 200 years ago, there was much discussion about where to locate the head office. Trondheim was chosen and one of the arguments in the debate was that locating the central bank far from the seat of government would prevent the central bank from coming under political pressure. It was not until 1896 that the Storting decided that the central bank should be moved to Kristiania (now Oslo). The strongest objection to relocating the central bank from Trondheim to Kristiania was expressed by Director Karl Gether Bomhoff, who was in fact also a friend of Henrik Ibsen from his Dresden period. 11 Bomhoff was a member of the Bank’s board for 35 years, from 1885 to 1920. In 1893, he became the first permanently employed chairman of the board and the first director for the entire central bank.
The interaction between the political authorities and the central bank can be effective if the authorities take the role of “leader”, and the central bank the role of “follower”. Inflation targeting provides a clear indication as to how the central bank should respond in different situations. The political authorities are the “leader” in this interaction. They can internalise the central bank’s – the “follower’s” – pattern of response in their actions. 13 Government spending growth can then be decided knowing the effect it will have on interest rates. We have also learned from history that financial bubbles and crises occur from time to time. Even though financial crises may seem to be very different, they usually have a common feature. The US economist Hyman P. Minsky was of the view that this could be summed up in five stages: First a shock, often triggered by a technological breakthrough or changes in legislation and regulation of the business sector, followed by a period of growth – a boom – where new technology and opportunities are applied. This turns into euphoria – people get carried away. At some point some people wake up and take out their profits by selling. This triggers a fall in asset prices and equity prices and ultimately leads to panic and a crash. 14 This is referred to as the Minsky moment. We are now in the midst of a global financial crisis, which originated in the US housing market.