enhance the independence and supervisory powers of the Bermuda Monetary Authority.

These measures, which are in keeping with internationally accepted principles, are essential to maintaining Bermuda's standing as a reputable offshore jurisdiction.

The Royal Gazette's editorial appeared to suggest that the BMA's charter should be expanded to enable the Authority to influence interest rates in order either to control local inflation or to encourage local investment.

Absent exchange controls, it is doubtful that the BMA can successfully influence $BDA rates. It is similarly doubtful that the BMA can do much to control inflation. Lastly, as a matter of public policy, it is questionable whether the BMA -- as distinct from the Government -- should make much of an attempt to encourage local investment.

Interest rates: Typically, modern central banks (such as the Federal Reserve Bank in the United States and the new European Central Bank) raise or lower rates in order to control the pace of economic activity.

However, the tools with which central banks adjust rates require deep, liquid domestic money markets that, as a small community of 62,000 people, Bermuda cannot be expected to develop.

In a world without financial borders and exchange controls, it is also impossible to manage rates by fiat. Set deposit rates too high, and it becomes difficult for the banks to deploy those deposits profitably, a situation that is bound to harm the banks' borrowers, employees and shareholders.

Set rates too low, and Bermudians will convert their $BDA into other currencies to capture the higher returns that are just a mouse-click away.

Additionally, because capital constraints effectively prevent Bermuda's banks from expanding their domestic lending activities, the BMA cannot expect to stimulate economic activity by lowering rates. This is so: (i) because the banks' access to capital is limited by Bermuda's 60/40 laws; (ii) because international capital adequacy standards require large amounts of capital to be set aside as a reserve against possible losses; and (iii) because banks' risk/return analyses consequently show that it safer and more profitable to allocate this capital to other businesses (mutual fund sales, custody, etc.).

So, while loan demand may vary with rates, the supply of lendable funds is largely inelastic.

Without a domestic monetary policy, our monetary policy is by default that of the Federal Reserve, the guardian of the currency into which our $ is freely convertible.

Inflation: Because most of what we touch and consume on this Island is imported, the inflation embodied in the prices of those goods is largely the product of monetary policies in the United States and elsewhere.

Nevertheless, the BMA can help to limit inflation (to that which is imported) by continuing to maintain the identity of the $US and $BDA, by continuing to ensure that the $BDA is readily convertible into other currencies and by doing its part to maintain the high reputation that Bermuda has as a financial jurisdiction.

This last point is particularly important because the Island needs the foreign currency flows, which Bermuda's international businesses provide, to pay for our imported goods. Jeopardising that income stream would imperil the parity and convertibility of the $BDA.

Local investment: There are many legitimate reasons to encourage investment in Bermuda. However, the Bermuda Monetary Authority is not the agency to provide that encouragement.

In fact, the BMA should actively encourage Bermudians to invest internationally. The reasons for this are several.

First, there is some evidence that too much local investment can be harmful.

For instance, much of the inflation in property prices -- which has resulted in a scarcity of affordable housing -- can be attributed to the exchange controls which formerly existed.

By limiting savings choices to domestic assets, exchange controls raised the prices of both real and financial assets above the levels that more free choice might have produced. The result: those without hard savings were penalised. (Although exchange controls have gone the way of the Berlin Wall, excessive government spending could have similar results: by increasing its share of the economy, Government forces up the price of scarce local resources.) Second, because of its lack of ability to control interest rates and to stimulate the economy, the BMA will be unable to help the Island in the event of a recession.

Should Bermuda residents invest only locally, it is likely that the value of all their investments will fall together. However, a diversified pool of non-Bermuda assets can limit the fallout from a strictly local recession.

Lastly, by encouraging foreign investment, the BMA helps to ensure that Bermuda will have the long-term earnings power with which to pay its bills.

Under Jim Brock and, more recently, Cheryl Ann Lister, the BMA has worked very successfully (together with the Registrar of Companies and a business community that has interacted closely with both) to provide this small Island with the regulatory climate that many larger countries lack.

Keeping and improving this climate is essential to the well being of each and every Bermudian. Monetarily, however, the Island is hostage to the fortunes of the US economy and to the policies of the Federal Reserve.

Although independence advocates might assert that we could shed our "dependent territory'' status without economic harm, no such assertion would be credible in the case of the more important, if less emotive and less visible, dependence that we have on "the Fed''. The idea isn't worth a Bermuda cent.

*** Preston Hutchings is a Bermudian and chief investment officer of RenaissanceRe Holdings Ltd.