Unelected central bankers are too mighty for everyone’s good, says former policy maker
Central banks were forced to largely go it alone in the effort to save the world from economic ruin less than a decade ago, but it left monetary policy makers wielding too much power and vulnerable to a backlash that could undermine their independence unless they’re reined in, according to a former central banker who helped shape the global response to the financial crisis.
Paul Tucker, a longtime Bank of England official who served as deputy governor from March 2009 to October 2013, takes an exhaustive look at the role of central bankers alongside other unelected experts in modern democracies, in his book, “Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State.”
So how did we get here? For the most part, it wasn’t a case of central banks embarking on a power grab as they scrambled to shore up the global financial system, Tucker said, in a phone interview.
In the early part of the crisis, it was natural for central banks to provide stimulus in a timely manner, acting in an emergency responder capacity that other policy makers couldn’t be expected to match, he said. But later, say in 2010 and 2011, legislators in countries that had room to implement fiscal stimulus stood pat.
They could have done more, “but that can be unpopular in the short run and they know if they sit on their hands, the central bank will be forced to do something, notwithstanding the costs,” he said.
But for central banks, being the only game in town comes with dangers.
“I think there is the risk of a backlash,” Tucker said. It could manifest itself in a number of ways. Another financial crisis in the next five years or so, even on a smaller scale than the last one, would likely be blamed on central banks for adopting monetary policy measures that fueled exuberance in financial markets, he said, even though policy makers had little choice given the lack of a fiscal response.
But there is a more insidious threat, he said. The danger is that politicians, taking note of the central bank’s extraordinary powers, will demand that central bankers take political considerations into account when fashioning economic policy.
That means it is crucial that central banks aren’t given responsibility for areas that aren’t central to their missions.
“The more power that you have that you don’t really need, the more the political world will lean on you to influence the way you exercise your powers,” said Tucker, who argues in the book for a “Money-Credit Constitution” that requires central banks to have an inflation target, a requirement that private banks hold reserves, a program that would provide liquidity to sound banks; the power to close down bankrupt banks, and limits on what the central bank can do with its balance sheet.
Indeed, the main aim of the book is to establish a framework for how democratically elected politicians should go about delegating authority to independent agencies in a way that leaves them accountable and democratically legitimate.
The European Central Bank may offer a stark example of what happens when independent institutions are forced to operate in a near vacuum.
Tucker has sympathy for the ECB, which proved in the depths of the euro crisis in 2011 and 2012 that it could rescue the shared currency project in the short run, while operating in an “incomplete constitutional framework” without the benefit of a corresponding euro-area fiscal authority or banking union.
“But what they cannot do,” he said, “is repair it. They can’t themselves build firm foundations for the euro area.”
That poses a communications challenge, in that ECB policy makers need to find a way to convey that reality to the European public, particularly in Germany and France, “without seeming to order politicians around…and without scaring people so much that it brings about the very crisis that it wants to avert.”
However, improved communication is a task that all central bankers should undertake, he said. That means engaging with the public at large, not just academic economists or politicians.
In the U.S., Fed officials should use their bully pulpit to hold the line on tougher requirements on big banks.
It’s too early to say whether Fed Chairman Jerome Powell and new officials will hold the line, but they’re bound to come under pressure to relax, Tucker said. The best approach would be for Fed officials, including not just regional Fed banks but members of the Board of Governors, fanning out and explaining their policies in simple language. That includes sitting down for television interviews, presumably with outfits other than CNBC and Bloomberg.
That also speaks to the notion that technocrats need to be more accountable. While “overreaching” by the technocracy isn’t the root cause of polarization and populist backlash across much of the West, it did make a contribution, Tucker said.
Moving to the type of framework advocated by Tucker is no overnight task. In the book, he acknowledges it could take a generation.
“I am optimistic in slow motion,” he told MarketWatch. “One of the things I discovered in public life was that if you have long horizons and your arguments are good and you adapt your arguments if you meet better arguments in public debate, then shifts can occur.”
Might Tucker be in a position again to help implement those shifts? Tucker was passed over for the top job at the Bank of England in 2012 in favor of Mark Carney, whose term ends next year. Tucker, who is now a fellow at the Harvard Kennedy Schools and chairs the Systemic Risk Council, has been mentioned as a candidate for governor.
Asked if he’s interested in the job, Tucker insisted he’s focused on deciding the topic of his next book.
William Watts is MarketWatch's deputy markets editor, based in New York. Follow him on Twitter @wlwatts.
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