A cautionary note on Carney’s anniversary – Beware the dangers of worshipping Central Bankers.
July 1, 2014
A year has now passed since the first foreign Governor in the Bank of England’s 319-year history sailed into Threadneedle Street on a wave of admiration. ‘Mark Carney: The George Clooney of Finance’ swooned the New Statesman, previewing the Canadian’s arrival by praising his ‘matinee idol good looks’ and ‘messianic’ early beginnings. This seemed in stark contrast to the dry, inscrutable, academic manner of departing Governor, Sir Mervyn (now Lord) King, whose management of the prelude to and aftermath of 2008’s financial crisis had come in for widespread criticism.
Meanwhile on the continent, European leaders worship at the altar of Mario Draghi, the suave Italian banker who replaced greying French bureaucrat, Jean-Claude Trichet as President of the European Central Bank in 2012. Dubbed ‘Super Mario’, he has been hailed for staving off further crisis in the Eurozone with the mere hint that he would use a ‘big bazooka’ of policy initiatives to keep the single currency going. As Draghi himself said with surprise, ‘There was a time, not too long ago, when central banking was considered to be a rather boring and unexciting occupation.’
Yet the cult of the Central Banker is nothing new. Indeed, electorates and politicians have form in placing unbridled faith in unelected Central Bankers at times of extreme economic crisis and shattered trust in elected politicians. The problem is, such faith all too frequently proves to be distressingly misplaced.
The super-star Central Banker was initially an inter-war phenomenon, borne from the unremitting faith the Big Four capitalist nations of the time (Britain, the US, Germany and France) placed in what Liaquat Ahamed in 2009 dubbed the Lords of Finance in his eponymous, magisterial book. In the 1920s, a quartet of elite bankers – the Bank of England’s Montagu Norman, Benjamin Strong of the Federal Reserve, Emile Moreau of the Bank de France and Hjalmar Schacht, President of the Reichsbank – had dominated global finance. Labelled the ‘Most Exclusive Club in the World’, the press had been in awe of how the foursome steered Western economies through the aftermath of the Great War. But they failed to anticipate the deflationary effects of their protectionist policy prescriptions. By 1931 only Norman was still in place.
He, Strong and Schacht, entranced by the deadening orthodoxy of sound money, believed that returning the world to the gold standard would best tackle the impact of reparations and war debts. Here in the UK, even as strong-willed a politician as Winston Churchill, who became Chancellor of the Exchequer in 1924, was railroaded into supporting a return to fixed exchange rates in the face of establishment expertise and the accusation that any failure to act would be tantamount to admitting Britain’s diminished global status. But the unassailable central bankers misaligned the rates of exchange and stoked up a credit bubble through artificially low US interest rates and colossal German borrowing. The road to ruin in 1929 and beyond was now set. For all the central bankers’ immense prestige, the gold standard crippled their room for manoeuvre when the global financial system went into freefall.
Manifestly the lessons of that era have been learned. Arguably, however, the extent and duration of active intervention by a new generation of central bankers after the 2008 crisis brings with it a different set of (to date unchallenged) problems that will, eventually, need fixing. We can only hope that events will allow us to do this at a time of our choosing.
As he celebrates his first anniversary at the helm as Governor of the Bank of England, Mark Carney has probably exceeded the high expectations that accompanied his arrival in mid-2013. To date, at least. Some of that has been down to luck and good timing: the delayed impact of unprecedented domestic QE stimulus and a lull in the Eurozone saga provided that space of confidence that released pent-up demand in the UK economy.
Indeed Governor Carney’s main strategic innovation – the promotion of ‘forward guidance’ – has proved an essentially cosmetic exercise. His inaugural announcement that ultra-low interest rates were here to stay, unchanged until such time as unemployment dipped below seven per cent, was designed primarily to provide business with a sense of certainty and confidence in a bid to kick-start investment. It was also a political gambit by this most politically attuned of Governors. The expectation was that even with economic growth, unemployment would stay above the prescribed level until at least May 2015, the date of the next General Election.
Purists might raise an eyebrow as to the notional independence of the Bank, especially as its inflation target had been surpassed each and every month for almost four years by the time the forward guidance was issued. If Mr Carney had enjoyed less goodwill, the fact that unemployment has fallen sharply and to a level below the seven per cent threshold might have fatally undermined the Governor’s credibility. As it is, in spite of recent hints of a rate rise, the presumption remains that interest rates will remain at rock bottom levels until the General Election is safely behind us and there is little pretence that this is in large part a political calculation.
However it would be a mistake to believe that the Bank of England’s policy of ultra-low interest rates (now beached at an unprecedented 0.5% for the past sixty-three months) comes without detriment to our future economic welfare. Near-zero rates have retarded the essential cleansing mechanism of capitalism. Countless so-called ‘zombie companies’ remain in existence as lending banks have no need to pull the plug on non-performers. This tying up of capital and labour in non-productive activity has engendered a false sense of security and boosted short-term employment levels. It also means that risk has been continually mispriced over recent years. All this suggests the creation of unsustainable bubbles in the economy and also augurs ill in the teeth of fierce global competition in the decade ahead.
Meanwhile, in spite of Mario Draghi throwing a blanket of promised bond-buying over the Eurozone, the playing out of grinding austerity on the continent shows that one perennial economic truism has not been properly accounted for – every large debtor at some point realises that when owing huge amounts of money, threatening default can give one the upper hand. Greece, Portugal, Spain, Italy all now find themselves in this boat.
No matter the notional independence of these central bankers, politicians have been willingly complicit in their strategies. Since the 1990s governments have been relinquishing control of monetary policy to independent central banks in the hope of freeing decisions from political intervention. While this should have helped governments and central banks in their principal task – the promotion of a stable monetary and legal framework that lubricates the economy with trust, the most crucial ingredient in any transaction – it has also had the effect of liberating politicians from the shackles of accountability and the urgent need to engage in tough economic reform.
Since 2008, the implicit message to central bankers has been to ‘Keep things calm and keep the money flowing’. The US Fed, now under Janet Yellen, has accepted an employment target around which to frame its interest rate policy; the Bank of England aims to achieve a nominal GDP; the European Central Bank does whatever it takes to save the single currency. None of these goals has the maintenance of trust at their heart and all could eventually serve to undermine capitalism. Meanwhile, keeping monetary policy at arms-length has allowed politicians, in the case of the Eurozone, to preside over the transfer of unprecedented amounts of financial sovereignty with minimal popular alarm.
The contemporary cult of the central banker is, in part, a reflection of voters’ despair with the political class across the Western world. Politicians, implicitly lacking faith in their own judgement, have been happy to relinquish responsibility to a new financial elite. Perversely, while bankers have never been held in lower public regard, elevation to Central Banker status has bestowed a new level of trust in Goldman Sachs alumni, Carney and Draghi. Central bankers have acted entirely rationally in insulating us from the most immediate, pernicious effects of the financial crisis. But they are essentially leading us into a world where risk is being improperly assessed. When the next downturn is in train their actions may only exacerbate feelings of popular and political impotence. Just as with the financial superstars of the 1920s, we may well discover that their judgement is not so unassailable after all.