Wall Street Journal editor at large Gerard Baker published a brief piece on central banking this weekend.
I found it very disturbing—more disturbing than the Presidential tweets, in fact. Because it’s a sign of the times.
Baker says that over the past three decades, “monetary policy has been something of a modern-day religion” ruled by “a priesthood of academically trained economists.” “These technocrats—he continues—were vested with an unusual level of authority in democratic, pluralistic systems.”
In a matter-of-fact tone he then notes that expert and independent central bankers were allowed such extraordinary latitude when inflation still posed a danger; but now that inflation fears have been replaced by “sustained disinflation”, we should not be surprised that politicians want to take back control of monetary policy. “Some will bemoan all this. But I simply show you the times” he opines with equanimity, after conflating in a few paragraphs the nomination of two lawyers at the head of the Fed and ECB (Powell and Lagarde), the seeming subservience of the Bank of Japan to its government, and Erdogan’s firing of Turkey’s central bank governor.
There is a complacence here that I just cannot share.
Independent, expert central bankers have done a lot more for us than taming the high inflation of the 1970s and early ‘80s (in itself no small feat). Advanced economies have gone through the worst financial crisis and global recession in modern history without falling into deflation or depression; then they bounced back to above-potential growth and record-low unemployment while inflation remained low and stable.
These are not achievements to be taken for granted with barely a shrug. Just take a look at countries where central banks are neither independent nor competently run, and you will see a very different picture.
Baker compares central banking to a religion, so I will make a different lofty comparison. In the post-war period, a growing number of countries enshrined the principles of democracy in robust institutional frameworks. In most cases, this happened as a reaction to the horrendous damage that dictatorships wreaked to peace, basic freedoms and human rights. Now we take all these things for granted, and we look with growing sympathy to authoritarian figures who—we think—might be better suited to address today’s pressing concerns, from immigration to income inequality. Should we bemoan this trend, or simply accept it as a sign of changing times?
In a similar way, we now look with rising lust to potentially unrestrained monetary easing to bankroll new social programs or ambitious climate change solutions, and to sustain strong economic growth into the indefinite future. If independent technocrats stand in the way, let’s push them aside. We don’t need them anymore.
This attitude cuts across the political spectrum. On the left, many dream of Modern Monetary Theory to fund greater government spending. On the right, the WSJ disparages their spending plans, but invokes looser monetary policy to juice growth—with an eye to next year’s elections, I suspect.
I wrote in an earlier blog that the greater risk to the Fed’s independence is its willing surrender to market pressure, not political interference. But both come from the same complacence, the same sense that we no longer need monetary policy to be run by independent experts.
I simply show you the times.