Bankers to get keys to kingdom
Critics fear for central banks' independence
Paul Vieira, Financial Post
Critics fear for central banks' independence
Paul Vieira, Financial Post
Published: Monday, March 30, 2009
Chris Kleponis/Bloomberg NewsCentral bankers from the G7. From left: Mark Carney, governor of the Bank of Canada, Christian Noyer, governor of the Bank of France, Axel Weber, president of the German Bundesbank, Ben S. Bernanke, ...
Nationalization, stimulation, subsidization, appropriation, bond buybacks and bailouts. In the space of a year, global policymakers have thrown away 30 years of free-market orthodoxy in an unprecedented intervention in the global economy. In the second instalment of a two-part series, the Financial Post takes a look at the repercussions for growth, banking and monetary policy.
OTTAWA -- Senior policymakers from the Group of 20 nations, led by those in Washington, are likely to agree this week to give their central bankers more power to ensure there's no return of the type of credit crisis that has rocked the global financial system.
That is no surprise, experts say, because central banks are endowed with the skill and know-how to detect asset bubbles, and act accordingly. And for the most part, their role in stabilizing the current global recession has been applauded.
But that doesn't mean everyone is happy with the behaviour to date of the guardians of monetary policy. There is concern about their inability to undo the stimulus they have injected, and the double-digit inflation that could ensue. Further, will central bankers be able to return to their independent ways, and their traditional single-minded focus on inflation, given how closely they have worked with their respective finance ministers in tackling the economic crisis? Or are they bound to become yet another agency whose role is to implement the wishes of the government of the day?
"The situation is changing so fast, and the unthinkable is becoming thinkable so rapidly, that you cannot make predictions about the relationship between central banks and governments anymore," said Andrew Hilton, director of the Centre for the Study of Financial Innovation, a London-based think-tank. "It is a bit difficult to see where it all goes because in the end, is there much difference between monetary and fiscal policy?"
Among those raising the red flag most forcibly about what the future holds for central banks is John Taylor, an economics professor at Stanford University. In recent testimony to the U. S. Congress, he described the recent moves of the U. S. Federal Reserve as "mondustrial" policy -- a combination of monetary and industrial -- in reference to how Ben Bernanke, the Fed chairman, opted to purchase securities and make loans to certain sectors and financial institutions through the creation of money, or quantitative easing, in central-bank lexicon.
"What justification is there for an independent government agency to engage in such a selective credit policy?" Mr. Taylor added. "For the Federal Reserve to be taking on these responsibilities raises questions about its independence,"
The Fed has taken among the most aggressive steps, moving in to save Bear Stearns and then American International Group, with the White House's blessing. And through recent initiatives such as the term asset-backed securities loan facility (TALF) and the purchase of U. S. treasuries, the Fed's balance sheet has ballooned an astounding 144% to US$4.45-trillion in just three weeks. In comparison, the Bank of Canada's balance sheet has grown roughly 47% since the onset of the financial crisis, from $54.8-billion to $80.6-billion, as of February. That may increase further if the Canadian central bank engages in quantitative easing, as suggested in this month's interest-rate announcement.
In the United Kingdom, the Bank of England has embarked on a bid to flood financial markets with cash through a US$200-billion-plus effort to acquire bonds, corporate debt and other securities. Until now the European Central Bank, which sets rates for the 16-nation Euro bloc, had laid low. But late last week, the ECB's vice-president indicated the central bank may offer banks long-term loans and acquire commercial paper to boost the continental economy.
The Fed's extraordinary action has been justified by a mission statement that clearly states it has a duty to supervise and regulate banking institutions, maintain the stability of the financial system and contain systemic risk that may arise in financial markets.
Nevertheless, Mr. Taylor says, these actions "have the potential to change the role of the central bank in the future in ways that could be harmful. The success of monetary policy during the great moderation period of long expansions and mild recessions was not due to a lot of discretion but to following predictable policies and guidelines that worked."
Geoffrey Wood, an economics professor at London's Cass Business School and special advisor to the Bank of England, also has concerns regarding where the Fed is headed.
"I do think there's a danger of the Fed becoming more of an active agent," he said. "More will be asked of it, it has taken more on itself, and it has taken big risks with its balance sheets. Given all this, it is more likely to make mistakes -- and if it makes more mistakes, it is likely to come under greater government influence."
Other analysts maintain central banks, including the Fed, can revert back to their traditional, independent role -- even with any additional regulatory responsibility that falls on their laps.
"Clearly central banks have conducted some of the out-of-the-box kind of policies, but I think these times called for that," said Nariman Behravesh, chief economist at IHS Global Insight, a Lexington, Mass.-based economic consultancy and forecasting firm. "Once the economy starts to recover, you will start to see the central banks reassert their independence--because I don't think anyone wants to go back to a situation in which the central banks are at the beck-and-call, if you will, of finance ministers or governments."
Eric Lascelles, chief economist and rates strategist at Toronto-based TD Securities, says central bankers are able to act nimbly in times of crisis compared to legislators -- in particular in Canada, which finds itself with a minority government and was in the middle of an election campaign when the crisis broke out in earnest.
In the United States, it is believed the Fed would take on the bulk of new oversight responsibilities as outlined last week by Timothy Geithner, the U. S. Treasury Secretary. As he envisages it, one entity would be responsible for ensuring systemic stability over major institutions, and critical payments and settlement systems.
Among the key regulator tasks, experts say, will be to identify, and then slowly burst, growing asset bubbles such as the dot-com boom of the late 1990s and the housing craze of this decade.
"What they can do about it is another question, however," Mr. Wood said. "They will need new instruments. They have rates to conduct monetary policy and help target inflation, but it would only be accidental if they could control asset bubbles at the same time. What those new instruments would be, nobody has any idea at the moment."
A key test as to whether central banks can go back to their accustomed knitting is when it comes time to unwind their balance sheets and take out the cash from the system. What if legislators object, arguing the economic recovery has yet to kick in?
"If the central bank feels it doesn't have the authority to stick its finger up at the state, then you do have the danger of moving toward Zimbabwe," warned Mr. Hilton, of the British think-tank.
That south African country has been subjected to hyperinflation, the result of its central bank forced to finance the public spending through directly acquiring Zimbabwean bonds from the government.
Most analysts, however, say central banks have exit strategies ready to pull excess cash out of the system. Mr. Hilton, a former World Bank economist, is not among those brimming with confidence.
"Western economies are like forests in autumn these days, with all the leaves lying on the ground and the wind still," he says. "What happens if the wind starts to blow? We will have to suck a lot of that cash out very, very quickly indeed."
Chris Kleponis/Bloomberg NewsCentral bankers from the G7. From left: Mark Carney, governor of the Bank of Canada, Christian Noyer, governor of the Bank of France, Axel Weber, president of the German Bundesbank, Ben S. Bernanke, ...
Nationalization, stimulation, subsidization, appropriation, bond buybacks and bailouts. In the space of a year, global policymakers have thrown away 30 years of free-market orthodoxy in an unprecedented intervention in the global economy. In the second instalment of a two-part series, the Financial Post takes a look at the repercussions for growth, banking and monetary policy.
OTTAWA -- Senior policymakers from the Group of 20 nations, led by those in Washington, are likely to agree this week to give their central bankers more power to ensure there's no return of the type of credit crisis that has rocked the global financial system.
That is no surprise, experts say, because central banks are endowed with the skill and know-how to detect asset bubbles, and act accordingly. And for the most part, their role in stabilizing the current global recession has been applauded.
But that doesn't mean everyone is happy with the behaviour to date of the guardians of monetary policy. There is concern about their inability to undo the stimulus they have injected, and the double-digit inflation that could ensue. Further, will central bankers be able to return to their independent ways, and their traditional single-minded focus on inflation, given how closely they have worked with their respective finance ministers in tackling the economic crisis? Or are they bound to become yet another agency whose role is to implement the wishes of the government of the day?
"The situation is changing so fast, and the unthinkable is becoming thinkable so rapidly, that you cannot make predictions about the relationship between central banks and governments anymore," said Andrew Hilton, director of the Centre for the Study of Financial Innovation, a London-based think-tank. "It is a bit difficult to see where it all goes because in the end, is there much difference between monetary and fiscal policy?"
Among those raising the red flag most forcibly about what the future holds for central banks is John Taylor, an economics professor at Stanford University. In recent testimony to the U. S. Congress, he described the recent moves of the U. S. Federal Reserve as "mondustrial" policy -- a combination of monetary and industrial -- in reference to how Ben Bernanke, the Fed chairman, opted to purchase securities and make loans to certain sectors and financial institutions through the creation of money, or quantitative easing, in central-bank lexicon.
"What justification is there for an independent government agency to engage in such a selective credit policy?" Mr. Taylor added. "For the Federal Reserve to be taking on these responsibilities raises questions about its independence,"
The Fed has taken among the most aggressive steps, moving in to save Bear Stearns and then American International Group, with the White House's blessing. And through recent initiatives such as the term asset-backed securities loan facility (TALF) and the purchase of U. S. treasuries, the Fed's balance sheet has ballooned an astounding 144% to US$4.45-trillion in just three weeks. In comparison, the Bank of Canada's balance sheet has grown roughly 47% since the onset of the financial crisis, from $54.8-billion to $80.6-billion, as of February. That may increase further if the Canadian central bank engages in quantitative easing, as suggested in this month's interest-rate announcement.
In the United Kingdom, the Bank of England has embarked on a bid to flood financial markets with cash through a US$200-billion-plus effort to acquire bonds, corporate debt and other securities. Until now the European Central Bank, which sets rates for the 16-nation Euro bloc, had laid low. But late last week, the ECB's vice-president indicated the central bank may offer banks long-term loans and acquire commercial paper to boost the continental economy.
The Fed's extraordinary action has been justified by a mission statement that clearly states it has a duty to supervise and regulate banking institutions, maintain the stability of the financial system and contain systemic risk that may arise in financial markets.
Nevertheless, Mr. Taylor says, these actions "have the potential to change the role of the central bank in the future in ways that could be harmful. The success of monetary policy during the great moderation period of long expansions and mild recessions was not due to a lot of discretion but to following predictable policies and guidelines that worked."
Geoffrey Wood, an economics professor at London's Cass Business School and special advisor to the Bank of England, also has concerns regarding where the Fed is headed.
"I do think there's a danger of the Fed becoming more of an active agent," he said. "More will be asked of it, it has taken more on itself, and it has taken big risks with its balance sheets. Given all this, it is more likely to make mistakes -- and if it makes more mistakes, it is likely to come under greater government influence."
Other analysts maintain central banks, including the Fed, can revert back to their traditional, independent role -- even with any additional regulatory responsibility that falls on their laps.
"Clearly central banks have conducted some of the out-of-the-box kind of policies, but I think these times called for that," said Nariman Behravesh, chief economist at IHS Global Insight, a Lexington, Mass.-based economic consultancy and forecasting firm. "Once the economy starts to recover, you will start to see the central banks reassert their independence--because I don't think anyone wants to go back to a situation in which the central banks are at the beck-and-call, if you will, of finance ministers or governments."
Eric Lascelles, chief economist and rates strategist at Toronto-based TD Securities, says central bankers are able to act nimbly in times of crisis compared to legislators -- in particular in Canada, which finds itself with a minority government and was in the middle of an election campaign when the crisis broke out in earnest.
In the United States, it is believed the Fed would take on the bulk of new oversight responsibilities as outlined last week by Timothy Geithner, the U. S. Treasury Secretary. As he envisages it, one entity would be responsible for ensuring systemic stability over major institutions, and critical payments and settlement systems.
Among the key regulator tasks, experts say, will be to identify, and then slowly burst, growing asset bubbles such as the dot-com boom of the late 1990s and the housing craze of this decade.
"What they can do about it is another question, however," Mr. Wood said. "They will need new instruments. They have rates to conduct monetary policy and help target inflation, but it would only be accidental if they could control asset bubbles at the same time. What those new instruments would be, nobody has any idea at the moment."
A key test as to whether central banks can go back to their accustomed knitting is when it comes time to unwind their balance sheets and take out the cash from the system. What if legislators object, arguing the economic recovery has yet to kick in?
"If the central bank feels it doesn't have the authority to stick its finger up at the state, then you do have the danger of moving toward Zimbabwe," warned Mr. Hilton, of the British think-tank.
That south African country has been subjected to hyperinflation, the result of its central bank forced to finance the public spending through directly acquiring Zimbabwean bonds from the government.
Most analysts, however, say central banks have exit strategies ready to pull excess cash out of the system. Mr. Hilton, a former World Bank economist, is not among those brimming with confidence.
"Western economies are like forests in autumn these days, with all the leaves lying on the ground and the wind still," he says. "What happens if the wind starts to blow? We will have to suck a lot of that cash out very, very quickly indeed."
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