and, ( iv ) sweeping bank loan losses under the rug by compromising supervisory and regulatory standards can create a facade of financial stability in the short run, but inevitably cause the fragile deck of cards to fall in a heap at some point in future, likely with a greater taxpayer bill and loss of potential output. while not always the case, often the required interventions for stable growth are structural reforms by the government with upfront fiscal outlay ; however, these may compromise populist expenditures or require displeasing incumbents. as a result, it might seem as an expedient solution to the government to ask / task / mandate / direct the central bank to pursue strategies that generate short - term gains but effectively create tail risks for the economy. to protect the economy from such short - termism, the central bank is designed to be at a safe distance from the executive branch of the government. undermining the independence of the central bank now, although the central bank is formally organised to be separate from the government, its effective horizon of decision - making can be reduced for short - term gains by the government, if it so desires, through a variety of mechanisms, inter alia, ( i ) appointing government ( or government - affiliated ) officials rather than technocrats to key central bank positions, such as governor, and more generally, senior management ; ( ii ) pursuing steady attrition and erosion of statutory powers of the central bank through piece - meal legislative amendments that directly or indirectly eat at separation of the central bank from the government ; ( iii ) blocking or opposing rule - based central banking policies, and favoring instead discretionary or joint decision - making with direct government interventions ; and, ( iv ) setting up parallel regulatory agencies with weaker statutory powers and / or encouraging development of unregulated ( or lightly regulated ) entities that perform financial intermediation functions outside the purview of the central bank. 3, 4 the most striking example is the presence of government - sponsored enterprises ( gses ) to support mortgages and home ownership in the united states. the gses are outside of any regulatory purview of the federal reserve, but have been deployed by successive governments to pursue populist housing policies, contributing significantly to the imbalances that led to the global financial crisis of 2007 - 08 and the ensuing great recession ( see, acharya, van nieuwerburgh, richardson and white, 2011, for details ). see acharya (

##roved in recent years. the world's largest economy, the united states, currently runs a current account deficit, financed to a substantial extent by capital exports from the emerging market economies. of course, it can be argued that the so - called “ global imbalances ” are a reflection of incomplete globalisation. but the fact remains that as long as globalization happens to be incomplete, public policy has to manage the consequential " imbalances ". secondly, in a globalising world, the context in which monetary policy is set, often leads to a confrontation with the impossible trinity – independent monetary policy, open capital account and managed exchange rate. the theory holds that at best, only two out of the three would be feasible. in practice, however, there is a shift in preference away from the corner solution with respect to financial imbalances. currently, intermediate solutions, which were earlier regarded as “ fuzzy ”, are now becoming increasingly relevant. moreover, in recognition of the differences between trade and financial integration – first pointed out by jagdish bhagwati – there is less certainty today about the corner solutions than in the past. thirdly, at a practical level, the recent experience seems to indicate that globalisation may have had accentuated potential conflicts that can impact the fabric of our societies, particularly, in view of rising corporate profits coupled with a reduction in share of remuneration for the labour. in this regard, i was struck by what mr. john micklethwait, editor - in - chief of the economist is reported to have said in an interview, as mentioned in a leading daily yesterday ( march 18, 2007 ). he said this in the context of the process of globalisation : " but as far as globalisation goes, i am worried about one thing : if you look at inequality, particularly in america, the rich have got even richer and the median income has barely budged. what is interesting is that just in the last couple of quarters, you began to see a sign of the wages beginning to rise. what if you have seen in the last ten years is the returns to capital increasing dramatically and returns to labour proportionately going down? what is happening now is that if you have the prospect of a downturn, then inequality will become much bigger issue in the american elections. around the world it is already a much bigger issue, including in places like japan. the corporate boss in japan now is paid 35 times what the