Jan Skoyles looks at the increasing politicization of central banks. If something which is supposed to be independent is becoming increasingly less so, who can we trust to protect the value of our currency? Perhaps instead we should turn to a faceless currency and invest in gold.
Over the weekend, in the shadows of the G20 summit, Jens Weidmann, president of the Bundesbank, expressed his concerns over the “creeping politicization of central banks,” reminding them of the need to maintain and remember their independence during this time.
What is it that’s driven the Eurozone’s most powerful central bank to express such concerns?
Alongside the inflation, currency wars, unemployment and dangerously loose monetary policies, this crisis is also about to break down the previously globally held view that central banks should be autonomous.
The existence of central banks, let alone their role, in the economy is a bone of contention for many. That said, they do exist and the majority are supposedly autonomous, if not independent.
But this autonomy, something which was handed to the Bank of England in 1997, looks to soon be in name only.
Bloomberg wrote late last week of the rise of ‘Whatever-it-takes Central Bankers’. The article cites a revolution which began ‘with the arrival of Mario Draghi’ in November 2011, who famously pledged to ‘do whatever it takes’ to protect the euro.
This new generation of central bankers are ‘more aggressive than their predecessors’ and their appointments indicate the pressure from the political elite to be more stimulating, particularly as the problems snowball and the ‘required’ measures become less conservative.
The revolution is now gaining pace as Mark Carney is set to join us here in the UK – he who expressed his lack of concern for above-target inflation. This won’t be a short-lived revolution either – someone will replace Carney, the Reserve Bank of Australia will be looking for someone new in September as will India. As soon as next month China’s Zhou Xiaochuan will be replaced and in June Russia’s Sergey Ignatiev will also be off leaving a space for the revolution to spread into.
We see in announcements from Ben Bernanke and Sir Mervyn King, that the role of a central bank has begun to change; now the newbies will redefine what a central bank will do. We see it already, banks aren’t just targeting inflation but instead they focus on bringing the economy back to full health.
Over in Japan Prime Minister Shinzo Abe is courting favour from the Keynesian elite, who believe that the way out of this crisis signals the politicization of central banks and monetisation of government deficits. Abe’s desire to do pick Japan out of its deflationary slump is the most current example of the politicization of central banks.
Prime Minister Abe has made it clear he expects the central bank to aggressively target inflation as well as use unconventional measures to help the Japanese economy. However not everyone at the Bank of Japan is prepared to play ball.
The current Governor, Masaaki Shirakawa, has received criticism from politicians that he has failed to do enough to support prices. Fearing asset bubbles, he has argued against keeping interest rates low for too long and argues the task at hand – ending deflation – isn’t something the central bank can do alone. On January 22nd the BOJ set a 2% target inflation rate, and agreed to open-ended asset purchases. However it appears the bank was not happy to bow down to Abe’s demands, statements show that they hold as little hope for hitting the 2% target than they did the 1%, whilst the forecasts for the CPI were little changed from October’s assessment. It appears the bank under Shirakawa’s rule is placing the burden of hitting the new target on Abe’s government.
Abe, conscious of an upper-house election in July, has said he will appoint a new governor who will demonstrate ‘a strong will to overcome deflation.’ Experts in Japan support Abe’s approach, arguing that the central bank has behaved churlishly as it defends it management of the economy.
It seems increasing numbers believe a coordinated approach of both fiscal and monetary policy is the solution to most countries’ issues. But in truth, someone has to take the lead – and I suspect it won’t be the central banks. Wrapping monetary policy decisions in with fiscal ones slows down and complicates the process which otherwise should efficient and made without interference.
Governments, for their guaranteed four years in power, think they don’t need to worry about inflation and almost encourage it. Therefore, if they can put some people in who have similar beliefs then they will – as we are seeing now.
Central bankers have proven their influential worth when it comes to politics and the markets. When Mario Draghi speaks markets hang on his every word, Bernanke dominated much of the US election chatter and Sir Mervyn King’s greying face appears more frequently on papers than that of our own PM.
It’s little wonder governments want to use them as their puppets. Unlike central bankers, the live-span of a government can be significantly shorter. It is no small secret that governments are inherently inflationary. Therefore one of the most obvious reasons we should maintain the autonomy of a central bank, and push for its independence, is because of government’s main aim to be re-elected and to run monetary policy alongside its other short-term objectives.
History and research shows that as soon as politicians begin to interfere in the management of the monetary policy, mistake are made. Romer & Romer find that central banks made their biggest mistakes during the 1930s Depression and inflation of the 1970s because governments failed to trust in the power of the central banks.
At the beginning of the year, President of the Federal Reserve Bank of St Louis, James Bullard gave a presentation on the ‘global battle over central bank independence.’ In it he argued for the conventional wisdom that we should ‘focus fiscal policy decisions on the medium and longer run and delegate monetary policy to an independent authority.’ He believes that the more central bank independence is weakened the less well executed monetary policy will be.
At the moment, central banks need to remain as independent as possible. They were given their independence so they could react to macroeconomic shocks effectively and quickly. Whilst they’re not doing a great job anyway, the situation will no doubt become far worse the more politicized they become. The more bogged down in political gains they become the less they’ll be able to even get us half way out of the crisis.
Some central banks are however managing themselves with much decorum – I’m talking about those ones who continue to buy gold, no doubt in response to this politicization of other central banks.
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