In The Money Trap, I argue that that the international monetary anti-system (to borrow Jacques de Larosiere’s phrase) makes it very difficult for central bankers to deliver financial and monetary stability in the long run.
I often wonder how many central bankers privately agree with this analysis but don’t dare to say so. How many take the position that, whatever their private views may be, their role is to operate this system as best they can? It is certanly the case that few dare openly to challenge or criticise the views of US officials or the Fed – though many grumble in private.
This is partly an intellectual and partly a moral question.
They face other such issues. By their record of success and their credibility central banks postponed the Financial Crisis for many years – possibly making it, in the end, even worse (the Minsky cycle). Now, well into yet another Minsky cycle, they have been granted new weapons and responsibilities to promote financial stability. Yet they appear reluctant to use them. Will they again allow imbalances to build up?
Some topical dilemmas
In the UK, Governor Mark Carney seems to be preparing public opinion for action to cool the housing boom. But no action has been taken. Charlie Bean, a retiring deputy governor, has remarked that the low level of volatility and search for yield, taken in isolation, are “eerily reminiscent of what happened in the run-up to the crisis” .
What to do? Yes, monetary policy ought to take greater account of stability concerns, but, Bean argued that it would be a “brave” central banker who deliberately plunged the economy into recession in order to prevent a future financial crash. Yet should we accept this bland reassurance at face value? Other people in many walks of life have to be “brave”: are central bankers to be excluded or excused?
Haruhiko Kuroda at the Bank of Japan has been praised for his large scale money creation policies. Does he deserve such praise, or is he just doing what the Ministry of Finance ordered?
In Sweden, central bank governor Stefan Ingves is resisting pressure to adopt an even more expansionary policy. In Frankfurt, Mario Draghi is not exactly dragging his feet but is clearly taking his time before placing the punchbowl back on the table.
Are these examples of moral courage or sheer foolishness, as critics say?
In India, Raghuram Rajan is hopefully secure in his position as governor of the Reserve Bank . Were the incoming government led by the populist Narendra Modi to be so unwise as to remove him, or put undue pressure on the RBI to cut rates further, inward investment on which India depends would collapse.
Yet the message that Rajan will give to the Modi government will not be to their liking: the room for manoeuvre is strictly limited. But does the new political leadership understand that the central bank has no magic wand?
Central bankers in emerging markets have faced up “bravely” to the huge tides of capital flowing in and out of their markets as investors globally respond in a flash to the latest signals from Washington, Frankfurt and London. But few have had the courage to criticise the system that produces such unfair results
Rajan has been outstanding here. He has begun to articulate a reasoned criticism of the system that inflicts unnecessary punishment on many relatively poor and defenceless people
In Nigeria, the central bank has exposed the scandal of the missing oil billions – and the governor was suspended for his pains.
In emerging markets, there are the sad cases of Venezuela, which is in an anarchy induced largely by currency mismanagement, and Argentina, looking dangerously close to following suit. These examples underline the importance of good central banking. They illustrate only too vividly what happens when political leaders destroy the integrity of the central bank. I do not know enough about the particular circumstances of these countries to know how much of a struggle the central banks put up before yielding to overwhelming political pressure.
The moral responsibility of central bankers
Don't be afraid to speak out
In The Money Trap, I argue that that the international monetary anti-system (to borrow Jacques de Larosiere’s phrase) makes it very difficult for central bankers to deliver financial and monetary stability in the long run.
I often wonder how many central bankers privately agree with this analysis but don’t dare to say so. How many take the position that, whatever their private views may be, their role is to operate this system as best they can? It is certanly the case that few dare openly to challenge or criticise the views of US officials or the Fed – though many grumble in private.
This is partly an intellectual and partly a moral question.
They face other such issues. By their record of success and their credibility central banks postponed the Financial Crisis for many years – possibly making it, in the end, even worse (the Minsky cycle). Now, well into yet another Minsky cycle, they have been granted new weapons and responsibilities to promote financial stability. Yet they appear reluctant to use them. Will they again allow imbalances to build up?
Some topical dilemmas
In the UK, Governor Mark Carney seems to be preparing public opinion for action to cool the housing boom. But no action has been taken. Charlie Bean, a retiring deputy governor, has remarked that the low level of volatility and search for yield, taken in isolation, are “eerily reminiscent of what happened in the run-up to the crisis” .
What to do? Yes, monetary policy ought to take greater account of stability concerns, but, Bean argued that it would be a “brave” central banker who deliberately plunged the economy into recession in order to prevent a future financial crash. Yet should we accept this bland reassurance at face value? Other people in many walks of life have to be “brave”: are central bankers to be excluded or excused?
Haruhiko Kuroda at the Bank of Japan has been praised for his large scale money creation policies. Does he deserve such praise, or is he just doing what the Ministry of Finance ordered?
In Sweden, central bank governor Stefan Ingves is resisting pressure to adopt an even more expansionary policy. In Frankfurt, Mario Draghi is not exactly dragging his feet but is clearly taking his time before placing the punchbowl back on the table.
Are these examples of moral courage or sheer foolishness, as critics say?
In India, Raghuram Rajan is hopefully secure in his position as governor of the Reserve Bank . Were the incoming government led by the populist Narendra Modi to be so unwise as to remove him, or put undue pressure on the RBI to cut rates further, inward investment on which India depends would collapse.
Yet the message that Rajan will give to the Modi government will not be to their liking: the room for manoeuvre is strictly limited. But does the new political leadership understand that the central bank has no magic wand?
Central bankers in emerging markets have faced up “bravely” to the huge tides of capital flowing in and out of their markets as investors globally respond in a flash to the latest signals from Washington, Frankfurt and London. But few have had the courage to criticise the system that produces such unfair results
Rajan has been outstanding here. He has begun to articulate a reasoned criticism of the system that inflicts unnecessary punishment on many relatively poor and defenceless people
In Nigeria, the central bank has exposed the scandal of the missing oil billions – and the governor was suspended for his pains.
In emerging markets, there are the sad cases of Venezuela, which is in an anarchy induced largely by currency mismanagement, and Argentina, looking dangerously close to following suit. These examples underline the importance of good central banking. They illustrate only too vividly what happens when political leaders destroy the integrity of the central bank. I do not know enough about the particular circumstances of these countries to know how much of a struggle the central banks put up before yielding to overwhelming political pressure.
Written on May 28, 2014 at 11:18 am, by robert
Categories: Homepage, News and Comment, RP's Diary | Tags: Carney