Time to end the sham of independent central banking
Letting central banks run monetary policy seemed a great idea in the 1990s. But it manifestly failed to end boom and bust. Now everyone shouts at central banks to solve the economy’s problems. Who should decide what they do? Only elected governments can, and it should be their responsibility.
Japan’s central bank governor has stepped down, cutting short his five year term of office by a full... three weeks. The resignation of Masaaki Shirakawa is symbolic, of course — it signals the Bank of Japan’s capitulation to political pressure.
Shirakawa lasted about six weeks after the new government, led by Shinzo Abe, took power on December 26, with “bold monetary policy” as its top campaign promise.
Western stereotype paints the Japanese as conservative and devoted to decorum. Yet they have broken a taboo that still binds the political debate in Europe and North America.
Since the 1990s almost every respectable politician and commentator has paid homage to the idol of central banking independence. But the last five years of crisis have exposed that worship as a fraud.
All those same politicians and commentators loudly proclaim their own ideas of what central banks should do — not just how they should fulfil their remits, but how those remits should be changed to address a plethora of social and economic ends.
At the same time, every snuffle of a central banker’s nose — even those not yet in office like Mark Carney, soon to take the helm of the Bank of England — is listened to as a hint of what he or she might be thinking of doing.
Will the BoE try a new burst of monetary stimulus, or even push for nominal GDP targeting? It seems to be up to a few individuals, steered by a governor, floating in a permanent intellectual Davos where the economic chattering classes battle. Who gave them the power to decide?
Central banks have indeed strayed far beyond their original briefs — from the US Federal Reserve’s buying $40bn of mortgage-backed securities every month, to the European Central Bank’s offer of unlimited purchases of bailed-out sovereign bonds.
Mostly this has happened with the tacit consent of the population — though there is a right-wing faction in the US that wants to abolish the Fed. Many people still trust central banks to know what’s best, and as long as they don’t sharply disagree with policy, are happy to let them get on with it.
But that is partly because central bankers’ status as independent, unelected technocrats gives them authority, like priestly guardians of a secret rite.
If there ever was a secret — perhaps in the classical days when the Bundesbank nurtured the Deutschmark in Germany’s stable, consensus-driven economy — there is no longer.
Central bankers themselves, just like other observers, disagree radically on the direction of policy, and even on what tools monetary policy should use and what it is for.
The justification for their independence was that, free of political passions, central bankers would do a better job of steering the monetary ship steadily and avoiding rocks. That turned out well, didn’t it?
The financial crisis originated in the bits of the economy that central banks were supposed to be watching: banking credit, financial markets, house prices, monetary union. As Alan Greenspan discovered, if you keep writing puts, sooner or later you have to buy a lot of securities.
A convenient whipping-boy
Blaming the crisis on central banks is not the answer — in fact, it makes things worse. Having an institution at arm’s length to scourge absolves other players — politicians, voters and the financial markets — of responsibility.
This political void is apparent in every major economy. The paralysis of the US political system meant the Fed had to take the lead in saving the US from the crisis and stimulating demand.
The ECB’s hands are tied more tightly, since any action it takes can move wealth and risk between countries, not just social groups. Yet the EU ducked the political challenge of creating a big enough safety net for Spain and Italy, so Mario Draghi had to do it. In Japan and the UK, it suits everyone to blame the central bank for economic sluggishness.
If they had the guts, politicians would take back the reins of monetary policy, as the Japanese are starting to do. Not that this would lead to miracles — more likely, they would rediscover how impotent and clumsy monetary tools can be.
Some areas of public life are rightly distanced from politics. Scientific research and the justice system are best left to experts, serving an objective truth.
Central banks’ decisions are not like this. There is little consensus on the right path. Choices have huge effects on the economy, and on the relative wealth and prospects of different groups — savers and borrowers, young and old, rich and poor. Why else would David Cameron have called himself “a fiscal conservative and monetary radical”?
The hypocrisy of this slogan is self-evident, and self-defeating. Cameron wants to be radical where he can’t — in other words, he hopes someone else will be radical for him.
Central banks need not become arms of finance ministries. They can still formulate policy independently, to reach specific targets. Their objective research — like those of new organs like the UK’s Office for Budget Responsibility — can help to inform policy and quantify its results.
But politicians must once again be forced to sign off central banks’ major decisions — and have the power and duty to direct them when necessary.