I wrote yesterday on what I will be calling a safe haven policy for the world's capital. I think this new idea may be a recurring theme for this blog over coming months and maybe longer.
In the context of that thinking I was interested to read (much of) the G30 report to the IMF meeting in Lima last week. That report, by four former central bankers, addressed the future of central banking. Two paragraphs, from the summary highlight issues I think if importance. The first addresses an issue where I have provoked some debate this summer:
It is crucial that the independence of central banks be maintained. Central banks must be able to focus on policies orientated toward longer-term objec- tives. They must be kept free from undue political or popular pressures to provide short-term stimulus or other policy actions that are ultimately inconsistent with this core mandate. The indispensable accountability should be ensured without prejudice to the principle of central bank independence.
Let me offer the second paragraph, which is the overall conclusion of the report before commenting:
Central banks worked alongside governments to address the unfolding crises during 2007—09, and their actions were a necessary and appropriate crisis management response. But central bank policies alone should not be expected to deliver sustainable economic growth. Such policies must be complemented by other policy measures implemented by governments. At present, much remains to be done by governments, parliaments, public authorities, and the private sector to tackle policy, economic, and structural weak- nesses that originate outside the control or influence of central banks. In order to contribute to sustainable economic growth, the report presumes that all other actors fulfill their responsibilities.
There are obvious paradoxes here. I wonder whether the bankes are even aware of them?
There is an arrogance implicit in the claim to independence: the unstated but obvious contention is that the central banker can be trusted more than the politician. This is reiterated in the opening sentence of the conclusion but then the apology (or is it doubt in the form of reducing expectation?) creeps in as the bankers state that they cannot deliver growth.
That, of course is true. It's not even clear central bankers can deliver the 'longer-term price stability [that] is the most important contribution central banks can make to ensuring strong and sustainable growth' according to the report. But with caveats then noted the central bankers then seek, unapologetically and despite their claim to be the holders of the higher ground as protectors of economic stability, to apportion responsibility for fulfilment of that task to the government's from which they wish to stand apart. The final sentence is almost comical as a result: caveat emptor would appear to be the message.
In that case what does central bank independence mean? I cannot help but believe that it is a claim to exercise control by an elite seeking unaccountable power whilst, as this report seems to make clear, wishing to avoid the responsibility for doing so. It is as if they were saying to governments that all things being equal they're able to deliver but that they know in advance that all things are not equal, despite which they wish the power anyway. The paradox in doing so is that inevitably all things cannot be equal because they wish to exclude themselves from that equality that they think embraces governments, parliaments, public authorities, and even the private sector but which, in their view, does not include central banks.
In that case if, as I argue, governments are to provide a safe haven for capital, but central bankers see themselves outside the system of government, then they represent an obstacle to that process of equal participation in solution building. We cannot have the ability of the state or its governments constrained by central bankers.
This is not to undermine the role of central banks. Nor is it to deny the skills they have to offer or the role that they have to play in monetary policy. Nor is it a call for the end of central bank independence to the extent that such independence represents the granting of devolved authority to manage with suitable controls in place to ensure integration in other economic policy. It is simply to say that integration into the overall context of the delivery of economic policy and independence as it is represented to be are not possible: one contradicts the other.
So what are we to have? Independent central banks on whom over reliance is placed (as at present)? Or governments willing to intervene, including through the use of monetary policy that central bankers manage on their behalf in coordination with other goals? Since the G30 report rejects the former and also recognises that growth requires multi-participant action then surely the integration of the second approach is the only viable option? In that case the semantics of independence that too many economists have made an article of faith without appearing to think through its consequences needs to be dropped.
Let's stop putting central bankers on a pedestal. Let's stop presuming they have power they clearly do not posses. Let's stop affording privilege where none is due. Let's start talking about the necessary tools for managing an integrated economy. Independent central bankers are admitting they cannot deliver that. In that case let's heed their advice in the report. They suggest advance planning for crisis is needed when saying this:
However, the ultimate resolution of crises that have their roots in excessive credit creation and debt accumulation often can only be accomplished through arms of government other than the central bank. Preparations made beforehand, such as legislation concerning bankruptcies, are crucial.
I would say advance planning for the crisis by restating the integral and not separate role of central banks is another condition for survival. Then, and only then, will it also be the case that politicians will accept their role as well. At present it is too easy for them to pretend they do not have one, as these central bankers are clearly implying. So the illusions of politicians need to be shattered as well.
To put it politely, the next crisis will require all hands to the pump. Petty divisions will not help achieve that. Making clear the limits to central bank independence is a critical part of achieving that necessary goal of unity.
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How can you possibly have influence on anything that you only control 3% of? How can you possibly have influence on people you are in a social/revolving door/bed with? The power of private banks has to be broken before any of this will happen, government through central banks is impossible until going into the banking sector from the public sector is seen as a step down, not on a par or up. No public servant should be allowed to cross back into the private sector willy nilly. I love the idea, but you cant make it work without decent regulation. Central bank independence is a joke, the central banking sector is so entwined you would need a scalpel to separate them from private banks.
The report is a complete and utter whitewash of the failure of the central banks to prevent the 2008 crisis. Central banks are, of course, not independent. They act as an industry champion for the Banking sector.
Central banks have one major important role, even more important than deliver low inflation. Deliver the safety of the banking system. They failed to do that. The capital (equity) ratios allowed under their Basle BIS agreements are far too low. Had capital ratios which been 30% to 40%, rather than 1% to 3%, the 2008 crisis would not have happened the way it did.
We should always keep this in mind. The Central Banks have failed in one of their major tasks – keeping the banking system safe. Central Banks were responsible for the crisis in 2008 and the Eurocrisis in 2010.
They are much like the regulators of the car industry, which have not managed to produce credible emissions figures. Self regulation by industry bodies does not work! And the central bank acts as an industry body here.
As governments took on the coal industry, they have to take on the banking industry, to make it safer. That means a truly independent central bank from the banking industry, run by government.
The fact that we still have derivative trading, excessive futures and options trading, and i-shares (ETF), which are nothing more than speculation by the financial sector, based on air, and underwritten largely by government guaranteed banks, means that the government should clear up the mess, which central banks have not been able to do.
They need to be held to account for their obvious failures, which no G30 whitewash report can hide!
The notion of independence is laughable. Central banks have to follow rules imposed by the Bank of International Settlements.
And who elected them? No one.
Excellent post; agree fully with your comments on the G30 report
The CB independence idea is clouded in ideology
Read my history of the US Fed – Treasury Accord to see, here:
http://www.levyinstitute.org/publications/lessons-from-an-unconventional-central-banker
My conclusion: A broader interpretation of the Accord and of Marriner S. Eccles’s role at the Federal Reserve should teach central bankers that independence can be crucial for fighting inflation, but also encourage them to be more supportive of government efforts to fight deflation and mass unemployment.
We need more open-minded central bankers that can brake out of the current balanced budget/inflation targeting/CB independence paradige, as you correctly observe
Thanks
Will read your paper soon
@ Thorvald G Moe. Thanks for the web links. I like the term Marriner Eccles used “democratic capitalism.” Perhaps we should also be using the term “democratic central banking.”
Thorvald,
I read the G30 report very carefully. Breaking out of the fiscal budgetary restraint straitjacket is exactly what the report is calling for. The problem is that governments are failing to step up to the need to fight deflation and unemployment by loosening their fiscal stance. Indeed the report points out that in some countries, austerity-minded governments have actually impeded central banks’ attempts to promote recovery. The US is the obvious example, where the sequester and the fiscal cliff shenanigans almost derailed recovery, but the same could be said about the UK. I can’t for the life of me see how ending central banks’ independence is a good idea when governments are hell-bent on inflicting unnecessary suffering on some of their citizens in order to buy the votes of others, notably those with more money.
You can’t
I can
Maybe because I think an alternative political narrative is not only possible but will happen
How about giving monetary policy directly to the public, via monthly electronic referendums? The public won’t be distracted by the electoral cycle. And if somebody worries that inflation would be too high because debtors would vote to inflate their debt away, the solution is to create a more equal society and to arrange that the average person doesn’t have such large debt.
The chance that this would not be captured or could be done at reasonable cost is remote
There is no such thing as ‘pure’ independence. We are interdependent…as human beings…and so are all the institutions we create. A central bank has no purpose, function or practical use if it is not interdependent with the State(s) that created them, their Government(s) at any given time, the state of the economy in which they operate, and with the financial sector whose behaviour they influence.
https://www.youtube.com/watch?v=fzZ1Gl5UfE0
“Our collective knowledge, economy, technology and environment are fundamentally interdependent”
It always comes down to the same question:
https://www.youtube.com/watch?v=0xEFoI2JgSc
who is going to be in charge of our destiny, elected politicians or unelected money men?
Isn’t it time we all recognised that central bankers and politicians can play the “Triple Game” in which they can both serve the interests of a rich elite and a majority of citizens (not necessarily at the same time or if at the same time not to the same degree) and finally serve their own interests in terms of seeking power and wealth?
Acknowledging the “Triple Game” surely means an integration of both effective democratically controlled governments and central banks in such a way that all rational interests are represented and hard to undermine.
BAM! One of your best posts I think. Really puts the point across well and succintly. Keep it up!
I believe that the role of the central banking system should be limited to regulating the administration of the zero-sum network of owed-wealth in general (‘money’ and non-‘money’ without distinction), and of regulating the owed-wealth liabilities of every financial institution and civil authority in particular. See the final point 3. below.
But first, two red herrings in this discussion:
1. The central banking system should not presume to any role in macro-economic policy (and should not be allowed any such role). Indeed, there should be no such thing as ‘monetary policy’. Macro-economic policy should be executed exclusively through civil fiscal policy in general, and to the TIMING of communal investment against the tide of market sentiment in particular.
2. The central banking system should not presume to any role in the management of inflation (and should not be allowed any such role). Indeed, there should be no such thing as ‘monetary policy’. Macro-economic factors whose value is determined by fiat ought to be inflation-linked passively ‘by default’. This inflation-linking ought to include currency-conversion rates (conventionally called currency-‘exchange’ rates), owed-wealth capital (or base interest rates), and scheduled payments. This passive inflation-linking would establish the global zero-sum network of owed-wealth as a global, macro-economically-neutral, level-value frame of reference for ‘real’ macro-economic activity (i.e. production, consumption, trade and employment). The macro-economic issues currently associated with inflation and currency-‘exchange’ rate instability should be seen as self-inflicted wounds caused by wilful variations from that ‘default’ inflation-linking. The concept of currencies (including inflation) is (or ought to be) a purely-administrative factor; of interest only to students of the history of routine commercial and financial administration, and completely-irrelevant to macro-economics.
3. Finally, to extend my opening assertion, the central banking system ALREADY in effect acts as IMPLICIT guarantor for every non-equity owed-wealth liability (‘money’ and non-‘money’ without distinction) of every financial institution and civil authority (through a wide range of ‘bailing out’ measures), and that role should be made EXPLICIT. The central banking system (including the global and state banks and regulators from the IMF downwards) should act as borrower/lender of FIRST/DEFAULT recourse for every financial institution and civil authority (i.e. rather than borrower/lender of LAST recourse as currently). This would eliminate (the need for) lower-level inter-bank owed-wealth, and would eliminate bank liquidity as a macro-economic factor. In order to moderate the risk implicit in such a facility (i.e. the risk currently ALREADY carried implicitly by the central banking system), the central banking system should itself commission all valuation and auditing standards and processes conservatively on behalf of creditors (rather than allowing politicians, bankers, corporate executives, and financial professionals free reign in their own self-serving interests). In doing so, they should follow the precautionary principle (i.e. financial innovation should be ‘prohibited unless specifically approved’, as opposed to ‘permitted unless specifically prohibited’). Indeed, the vast majority of financial innovation (including the securitisation of owed-wealth such as with GB Gilts, US Treasuries, and other state, commercial and mortgage-backed securities, and ‘administrative obfuscation’ such as ‘quantitative easing’) should be outlawed in favour of simple inflation-linked current-accounting.
Sorry Tim – from assumption 1 onwards that is absurd
You think we can do without central banks? Just not credible
And you think interest rate policy irrelevant? Sorry, again dream on
Shall we live in the real world here?
I have NOT suggested we do without central banks. In the first paragraph of my original contribution, and in bullet 3 of that contribution, I HAVE suggested that ‘the role of the central banking system should be limited to regulating the administration of the zero-sum network of owed-wealth in general (‘money’ and non-‘money’ without distinction), and to regulating the owed-wealth liabilities of every financial institution and civil authority in particular’. That is a MASSIVE role and responsibility, a pre-requisite for any and every kind of ‘financial safe haven’, and currently not done by any institution. Who was ‘responsible’ for limiting the national debt of the central bank and state? It couldn’t be the ultimate creditors (i.e. the global community of savers and pensioners, and the tax-payers of Germany). They didn’t and couldn’t know where their owed-wealth assets had been deployed, and how their liabilities had accumulated. It couldn’t be the ultimate debtors. The Greek citizenship didn’t and couldn’t know how badly their central bank and state had over-borrowed. It couldn’t be the Greek central bank and/or state themselves. They had a venal vested interest in employing ‘Enronomic techniques’ and/or ‘quantitative easing’ to hide their mismanagement whilst buying popularity by running up the national debt. It can’t be left to bankers like Goldmans. They make a fortune by helping to disguise the mismanagement and to add credibility. The responsibility HAS to be a SYSTEMIC GLOBAL responsibility; exercised from the IMF downwards through central banks.
I have NOT suggested that ‘interest rate policy’ is irrelevant. I HAVE suggested a GLOBAL policy to synchronise inflation-linking of ‘exchange’ rates and BASE interest rates to eliminate the spurious degrees of freedom in the administration of owed-wealth which allow the current banking professionals to ‘enclose’ so much of the global ‘wealth of nations’. Interest rate policy (synchronised with exchange rate policy) is DESPERATELY relevant. My point is that the current arrangements are unfit for purpose. We do not need to let the bankers hold us to ransom. I DID intended to suggest that management of BASE REAL rates of interest are unfit for the purpose of managing macro-economic affairs, and that passive synchronised inflation-linking of exchange-rates and base interest rates is better than spurious beggar-thy-neighbour race-to-the-bottom mismanagement (by central banks and competing states). REAL interest rates (compounded on top of inflation-linked BASE rates) are micro-economic factors.
I find it extraordinary that you (and so many others) argue that ‘radical change’ is required in the management of our macro-economic affairs, but baulk at any and every purposeful proposal to do so. I know my proposals are radical. However, I am not being radical just to flex my macro-economic muscles. The current dysfunction is so profound that only radical proposals stand any chance of fixing the problems. Please don’t dismiss them with patronising put-downs.
Tim
I apologise if you think my comment was inappropriate
However, I do think your proposals so radical that they are wholly unrealistic
I admit I try to deal in what I think possible in realistic time scales and I do not think what you are suggesting is in that group
Richard
Time to put the central banks out of business. Please read this http://www.thebcgroup.co.uk/austerity.pdf to see the truth about money creation and money supply.
Thanks for this, Justin.
Richard, it is this historic information which should be drawn to the attention of the sixth formers whom you have been asked to advise, in order to help them understand why we appear to be saddled with debt today.
Here are three quotes from history about central banking that we can’t ignore:
“Capital must protect itself in every possible way, both by combination and legislation. Debts must be collected, mortgages foreclosed as rapidly as possible. When, through process of law, the common people lose their homes, they will become more docile and more easily governed through the 6 strong arm of the government applied by a central power of wealth under leading financiers. These truths are well known among our principal men, who are now engaged in forming an imperialism to govern the world. By dividing the voter through the political party system, we can get them to expend their energies in fighting for questions of no importance. It is thus, by discrete action, we can secure for ourselves that which has been so well planned and so successfully accomplished”
Montagu Norman, Governor of the Bank of England, in a speech he gave to the US Bankers Association in 1924.
“The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences. The apex of the system was the Bank for International Settlements in Basle, Switzerland; a private bank owned and controlled by the world’s central banks which were themselves private corporations. The growth of financial capitalism made possible a centralization of world economic control and use of this power for the direct benefit of financiers and the indirect injury of all other economic groups.”
Professor Carroll Quigley in his book ‘Tragedy and Hope — A History of the World in Our Time”
“I am afraid that the ordinary citizen will not like to be told that the banks can and do create and destroy money. And they who control the credit of a nation direct the policy of governments, and hold in the hollow of their hands the destiny of the people.”
Reginald McKenna, Chancellor of the Exchequer 1915-16, addressing in 1924 his stockholders as chairman of the board of the Midland Bank.