Stop sniping at central banks and set clear targets

11th January, 2019

What is the most important job in the world? President? Teacher? Parent? I suggest a post that would not feature on most people’s lists: central banker.

James Carville, who advised US president Bill Clinton, once quipped that he wanted to be reincarnated as the bond market, able to intimidate anybody. But as Ben Bernanke, Mervyn King and more recently Mario Draghi (crisis-era central bank heads in the US, UK and EU respectively) demonstrated, even the bond markets must bow to the desires of a central banker with trillions to spend.

Thank goodness for such financial superpowers. These central bankers have a strong claim to having prevented a rerun of the Great Depression. But the crisis is over, Mr Draghi is the last of that cohort still standing. Now in the final year of his term as European Central Bank president, he announced this week that eurozone quantitative easing would end this month.

So can central bankers now step out of the spotlight and toast their own intelligence, decisiveness and humility with a decent claret? It seems not. Politicians are spoiling for a fight.

President Donald Trump recently accused the US Federal Reserve of having “gone crazy” (the alleged sign of insanity: nudging interest rates up during a boom). Turkey’s Recep Tayyip Erdogan has been leaning on his central bank. And when the Reserve Bank of India’s governor abruptly resigned this week after weeks of political pressure, nobody was buying his claim that it is “for personal reasons”.

In the UK, Mark Carney, the governor of the Bank of England, has drawn fire both from prime minister Theresa May and Brexiter Jacob Rees-Mogg. Central bankers claim to be uninterested in politics, but politics is interested in them.

To understand how we got here, it is worth remembering why the idea of independent central banking, fashionable in the 1920s, became the received wisdom again in the 1990s.

The aim was simple: credibility. Politicians are always tempted to lower interest rates to keep the economy hot, unemployment low and voters happy. This might achieve short-term benefits but it undermines an economy’s health and stokes inflation. Even a principled politician’s promises to curb inflation would not be believed; bond markets would demand an inflation premium, unions big pay rises.

A flint-hearted technocrat can at times deliver better results for everyone. In the early 1980s, Fed chair Paul Volcker demonstrated the basic idea that inflation could be crushed by a sufficiently badass central banker. New Zealand formalised the arrangement a few years later by giving the Reserve Bank of New Zealand an explicit inflation target, regardless of consequences.

That target was hit. “Inflation will be defeated” seems to be partly a self-fulfilling belief, so credibility is a strong argument for central bank independence.

Yet central bankers have experienced some serious mission creep over the past decade. Paul Tucker, a former deputy BoE governor and author of Unelected Power (UK) (US), notes that we have handed ever more power to them. There were reasons for this. Central banks operate through the banking system and have the ability to create new money without limit. Instead of watching the crisis of 2008 from the sidelines, they rolled up their sleeves and got involved in almost every part of the bond and loan markets. Yet these efforts — from buying up debt to regulating mortgage availability — created winners and losers. That is the natural domain of politics.

And so we have three options. The status quo is to leave powerful unelected officials free to act with wide discretion, while serving as a scapegoat for politicians who have nothing else to offer. That will not do.

Or we could double down on autonomy. The central banks got plenty right during the crisis and, given the sorry state of politics at the moment, technocracy has a certain appeal. If the UK appointed Mr Carney supreme dictator for life and bought him a nice dress uniform, he surely couldn’t do a worse job of running the country than the elected politicians currently attempting to interpret the “will of the people”.

But the long-run health of our democracies demands that our politicians start taking responsibility again. The Brexit referendum demonstrated that it is unwise to turn over direct policymaking power to us voters; we lack the time, expertise and interest. Yet it is undemocratic to place the levers of power two or three steps away from the people.

There is no easy or complete solution, but Mr Tucker is right to demand a return to clear mandates for independent agencies, set and monitored by elected politicians. That is partly to keep the technocrats in check, but also to force politicians to step up.

If we see clearly that responsibility lies with elected officials, then we may start to value expertise for the sake of expertise again. We are only likely to trust technocrats to deal with the technical details if we see that politicians are dealing with the politics. We cannot allow unelected people unlimited discretion. But just as importantly, we cannot tolerate our politicians acting like children and hoping that the grown-ups will tidy up the mess.

Written for and first published in the Financial Times on 14 Dec 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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