Criticism of central banks: sometimes needed

2019 is likely to be another year where the independent mandate of central bankers comes under pressure from populist politicians in democracies. It is easy for those in the market to sympathise with the quiet technocrats over the loud-mouthed headbangers, but scrutiny is deserved.

  • By Jasper Cox
  • 18 Dec 2018
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“Feel the market, don’t just go by meaningless numbers,” US president Donald Trump urged the Federal Reserve on Tuesday, ahead of this week’s meeting, where another rate hike is expected.

As a businessman with a fondness for piling on leverage, Trump may have a natural inclination towards loose monetary policy.

But his team will also have an eye on the 2020 election: now the mid-terms are out of the way, the US will start gearing up for the next presidential vote. But the economic cycle may not synchronise well with the voting cycle, from Trump’s point of view.

Analysts and investors are now concerned about growth in the US over the next few years.

“Earlier-than-expected tightening, primarily via the stock market, which was one of the triggers for the likely US slowdown into recession that we identified in our outlook, implies a pretty clear risk of an earlier slowdown than in our baseline scenario,” warned Erik Nielsen, chief economist of UniCredit, last week.

That bank had originally predicted that a slowdown would start in the country around the middle of next year 2019 leading to a brief and mild recession in mid-2020.

Trump will find it helpful to blame the Fed for raising rates too far, too fast, as he seeks to bat off any criticism.

Politicians are attacking central bankers in other democracies as well. The governor of the Reserve Bank of India, Urjit Patel, resigned last week after fighting between his institution and prime minister Narendra Modi’s authoritarian-minded government.

Ironically, Patel himself had called on the US Fed to slow plans to trim its balance sheet due to the impact on the offshore dollar market.

Meanwhile, as the UK jolts towards some sort of Brexit climax, governor of the Bank of England Mark Carney is under attack from politicians who think that his alarm over Brexit is overdone.

Focus will turn to the eurozone next year, with the European Central Bank replacing president Mario Draghi.

Any speculation about a fierce disciplinarian such as Jens Weidmann, head of the Bundesbank, taking the reins will invite criticism from outside the eurozone core, given his Ferruginous hawkishness.

Fuelling discontent

Those in the market tend to side with the technocrats when politicians attack them. 

The concept of an independent central bank is ingrained in economic orthodoxy, after all. Investors tend to regard the views of politicians as both short-termist and ill-informed when it comes to monetary authority.

The assumption is that the elected representatives should just stay in their lane.

Often they are right about those politicians' shortcomings. But sometimes central banks deserve legitimate criticism, and it should not just be specialists who can get involved in debates about interest rates and quantitative easing.

This is particularly the case given the expanded remit of those banks since the crisis. 

As politicians dithered over firefighting measures, central bankers played an important role in stabilising the financial system, for example through international swap lines. 

And as conservatives around the West decided to tighten fiscal policy while the economy was still recovering, monetary measures like low rates and quantitative easing took on the role of stimulating demand.

The consequences of that hyperactivity are now all around us.

It is hard to conceive of Matteo Salvini’s new Eurosceptic Italian administration being so popular in a world where European central bankers had not attempted to intervene in Italy’s domestic tax and spending decisions.

Most notably, in 2011 then governor of the Bank of Italy Mario Draghi and then ECB president Jean-Claude Trichet told the country to change labour laws, cut the deficit and open up public services.

Days afterwards, the ECB started a programme buying Italy’s bonds, and the government went on to pass an austerity package.

Turning to the UK, it is hard to conceive of hard-left Labour leader Jeremy Corbyn gaining the traction he has with young people without a house price boom pricing them out of the market. 

The Bank of England’s own figures estimate that house prices would have been 22% lower than they were in 2014 without the loose monetary policy introduced after the crisis first started.

Monetary policy does not exist in a separate sphere to other areas of governance. And so it should be debated in a democracy, just as economic and social policies are.

This is particularly the case in the eurozone, where the central bank has overstepped the mark furthest.

Trying to shield central banks from accountability will only lead to greater dissatisfaction, and the election of ever more irresponsible governments — perhaps until the whole concept of independent central banks is overthrown.

  • By Jasper Cox
  • 18 Dec 2018

All International Bonds

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 JPMorgan 382.27 1781 8.35%
2 Citi 352.79 1522 7.70%
3 Bank of America Merrill Lynch 303.84 1316 6.63%
4 Barclays 273.76 1150 5.98%
5 HSBC 225.76 1248 4.93%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 57.16 234 8.34%
2 Credit Agricole CIB 44.53 208 6.50%
3 JPMorgan 34.02 99 4.97%
4 UniCredit 30.43 162 4.44%
5 SG Corporate & Investment Banking 30.18 151 4.41%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 JPMorgan 13.16 82 8.26%
2 Goldman Sachs 12.58 64 7.89%
3 Morgan Stanley 12.18 55 7.64%
4 Citi 10.09 71 6.33%
5 Credit Suisse 6.93 38 4.35%