Like the United States, during the past decade, Japan and many European nations saw how concentrating so much power in the hands of a few unelected officials can be dangerous.
The risks were personified by Alan Greenspan, Fed chairman from 1987 to 2006. Dubbed the “Maestro” in a gushing book by Bob Woodward, Mr. Greenspan became a one-man think-tank. What he said affected everything from taxes to regulation to trade to debt issuance. Few dared question a man seen back then as a guru.
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Time to Rethink Excessive Trust in Central Bankers
Bloomberg
1 January 2009
If only we had listened to William Greider 20 years ago. Greider’s book, Secrets of the Temple: How the Federal Reserve Runs the Country, has long irked Federal Reserve staffers. His thesis was that the central bank’s power and opacity are “the crucial anomaly at the very core of representative democracy”.
Were Greider to revise his book today, he might focus on how central bankers came to run the world. It’s a global anomaly that must be addressed as we consign 2008 to the history books and look ahead to the challenges of 2009.
Like the United States, during the past decade, Japan and many European nations saw how concentrating so much power in the hands of a few unelected officials can be dangerous.
The risks were personified by Alan Greenspan, Fed chairman from 1987 to 2006. Dubbed the “Maestro” in a gushing book by Bob Woodward, Mr. Greenspan became a one-man think-tank. What he said affected everything from taxes to regulation to trade to debt issuance. Few dared question a man seen back then as a guru.
Japan’s over-reliance on central bankers took a different shape. Political paralysis left the economy’s ups and downs to the Bank of Japan. Once rates hit zero, politicians demanded the central bank do even more, so that they wouldn’t have to do their jobs.
As Europe devised its single currency, the fiercely independent German Bundesbank was the model for the region’s central bank. Its mandate is fighting inflation. As recently as July, with a global crisis spreading, the European Central Bank raised interest rates. The ECB operates without a government looking over its shoulder.
All this could have been avoided if Greider and critics such as US Representative Henry Gonzalez, a Texas Democrat, had more company in the late 1980s and early 1990s.
One of the key tenets of globalisation was the interconnectedness of markets. The previously obscure Bank for International Settlements moved into the spotlight. When Nick Leeson brought down Barings in 1995 and John Meriwether’s Long-Term Capital Management collapsed in 1998, the views of BIS officials were in hot demand in the media.
Ceding control to central bankers had a certain logic. Investors liked the idea of these greybeards being the adults in the room, making decisions removed from the taint of politics. Elected officials were free to do their worst, so long as central bankers were around to keep things humming.
The world knows better now. Yes, elected officials make lots of mistakes and their motivations can be questionable. The Fed also is far less opaque than it was 20 years ago.
Yet we are paying the price for years of Mr. Greenspan imposing his free-market ideology on the world’s biggest economy. Europe will pay its own for a central bank in denial about deflationary risks. Japan is realising how politicians used the Bank of Japan to shirk their responsibilities to modernise the economy and create jobs.
Really, central bankers are less to blame than the elected officials who outsourced policymaking to appointees. Turning the keys over to central banks reflected a belief that economies just needed a bit of fine-tuning here and there. This mindset allowed many financial and social weaknesses to fester.
In 2008, politicians’ reliance on monetary officials reached new levels as central banks churned out waves of liquidity, bailed out private institutions and bought untold amounts of debt. As 2009 unfolds, elected leaders will be grabbing back the reins of financial management.
With central banks running out of conventional options, fiscal policy will move back to centre stage. Issuing debt, tweaking taxes and creating new incentives will get renewed attention in Brussels, London, Tokyo and Washington.
An obvious exception here is China, which lacks a dominant monetary power. Decisions made in Beijing will still be among the most important anywhere. Any move to slow purchases of US Treasuries will have massive ramifications. China also will increase borrowing to stabilise its economy. That will exacerbate a “crowding out” phenomenon as governments increasingly dominate bond markets.
Efforts by Fed chairman Ben Bernanke, Masaaki Shirakawa at the Bank of Japan and Jean-Claude Trichet at the ECB will still matter. They will be called upon to contain panic amid double-digit losses in stock markets or chaos in currency markets.
Yet the onus is now on governments to do their part, and economies will be better off for it. Central banks’ adding and subtracting money has done little to address one of the biggest imbalances from Washington to Tokyo: the swelling gap between rich and poor.
Low interest rates can help a society’s weakest gain access to credit. That’s no substitute for programmes and funding to educate people for a world in which ideas and innovation hold more value than manufactured goods. Nor should it be left to central bankers alone to devise a new regulatory environment for the global financial system.
The key is to build guardrails to keep markets from driving economies over the cliff again. Ending the excessive trust that governments placed in a few economists is a good place to start.
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