Russell Lynch: Central banks are now too powerful to have free rein … Who guards the guards? It's a question worth asking as the Bank of England takes on a vast new remit to oversee the financial system alongside its existing rate-setting powers next week. It was a question also bothering many of the "rock stars" of economics on parade at the London School of Economics this week, including the IMF's chief economist Olivier Blanchard and former US Treasury Secretary Larry Summers. Amid all the valedictory bonhomie for outgoing Governor Sir Mervyn King, some of their comments may have given food for thought to his successor Mark Carney, who took his place in a distinguished audience that might have been a Who's Who of central banking and economics. – Evening Standard
Dominant Social Theme: Accountability!
Free-Market Analysis: One of the biggest dominant social themes currently is increased central banking accountability – or even a wholesale reorganization that brings central banks entirely under public sector purview.
In this issue of the Daily Bell as in others we continue to trace the evolving Greenbacker argument regarding the necessity for governments to issue currency. How this will alleviate the problems caused by monopoly central banking we are not sure. In fact we don't believe it will do anything. But it is the fashion of the moment.
We can tell it is fashionable because according to the article excerpted above, the Western world's top central bankers just spent a few days debating the issue. Interestingly the article calls those who participated the "rock stars" of economics.
Why economics needs "stars" is not clear to us anymore than the efficacy of Greenbackerism but they obviously exist and garner commentary if not groupies. Here's more from the article:
The Canadian will take up the reins at a beefed-up bank, whose Prudential Regulation Authority will watch over 1700 firms. Soon policymakers will have even more levers to pull. Higher capital buffers will take the punchbowl away when the party is in full swing. So-called sectoral capital requirements will make it dearer for the banks to lend against homes and commercial property if the Bank's new Financial Policy Committee sees fit. The FPC decrees, and the PRA will deal directly with the financial institutions.
The change comes at a time when Threadneedle Street's monetary policy wing is also holding government bonds worth around £375 billion, a quarter of the nation's output, through quantitative easing. The Funding for Lending scheme is throwing billions in cheap money at the banks to lend on mortgages and (gradually, in theory at least) to businesses, heaping more credit risk on the central bank which has been indemnified by the Treasury for potential losses.
The scope of the Bank of England's operations is now quite breathtaking, if not frightening. For two decades, central bank independence has been axiomatic to monetary policy. Freedom to set interest rates without political interference has been sacrosanct. But we're a world away from the blessed era of the Great Moderation, when the Bank focused on price stability via quarter-point tweaks in interest rates. We are asking so much more of our central banks, particular in the fiscal arena, that we may need something beyond the current system of parliamentary accountability.
As Blanchard put it: "If you think now of central banks as having this much larger set of responsibilities and this much larger set of tools, then the issue of central bank independence becomes much more difficult. Do you actually want to give an independent central bank the right to choose loan-to-value ratios without any supervision from the political process? Isn't this going to lead to a democratic deficit in a way where a central bank becomes too powerful?"
This last paragraph reveals both the concern and the risibility of the modern monetary dilemma. We are to choose apparently between banking supervision and political supervision. Talk about a Hobson's Choice! The alternatives are simply bad … and worse.
The idea that "rock star" economists could spend their days at the London School of Economics discussing ways that the political apparatus could have more say about central bank policies is surely a dead end. There will be no improvement when career politicians create monetary policy.
The answer is obvious to anyone who examines these arguments critically. As monopoly central banks expand their power and policies dramatically, what is needed is not "transparency" or more political involvement but a viable movement that seeks to oppose this trend altogether.
Would that these economic rock stars actually spent their days discussing LESS supervision and more competition when it comes to Western monetary systems. Instead, they apparently spent their time discussing ways to impose DIFFERENT kinds of supervision.
Here is perhaps the biggest trend of all: The authoritarian impulse of economic modernity never seems to diminish.