Pearls and Irritations

Central banks worldwide facegrowing criticism for putting money before people, for contributing to growing inequality and social disadvantage. But change is coming.

Growing dissatisfaction with central banks.

Post GFC, world central banks faced a growing chorus asking if they are doing a good job, whether their independence from elected government is justified.

Criticisms cover a wide variety of complaints: Unjustified “technocratic exceptionalism” as basis for independence from government and accountability; overly-rigid and possibly erroneous policies demanding “austerity” from governments; putting finance before people; social and infrastructural devastation; denying credit to governments when needed; and more.

One of the more vocal critics has been the Guardian (UK) economics editor, Larry Elliott, who wrote in 2019 that current monetary policy was a part of the neoliberal project. The separation of monetary and fiscal policy serves the neoliberal status quo, he said.

“Collectively, central banks failed to stop the biggest asset-price bubble in history from developing during the early 2000s. Instead of taking action to prevent a ruinous buildup of debt, they congratulated themselves on keeping inflation low. The price of houses and shares soared, but wages flatlined.”

In the US, President Trump said the Fed has damaged the economy by pushing up interest rates too quickly. Bernie Sanders has said the US central bank has been captured by Wall Street, Elliott wrote. “Both arguments are correct. It is a good thing that central bank independence is finally coming under scrutiny. For a start, it has become clear that the notion of depoliticised central bankers is a myth. Central bankers have views and – perhaps unsurprisingly – they tend to be quite conservative ones. As the US economist Thomas Palley notes in a recent paper, central bank independence is a product of the neoliberal Chicago school of economics and aims to advance neoliberal interests.”

Also in 2019, the Daily Telegraph (UK) economics correspondent wrote that it was small wonder that central banks independence was under threat.

“Central bank independence has not obviously served us well these past 20 years. Inflation used to be the big economic bogey. Yet applied to what is structurally a disinflationary age, inflation targeting has had the effect of driving interest rates progressively lower, putting a rocket under asset prices, increasing wealth inequality, creating financial instability at potentially enormous economic cost, and via the misallocation of capital these effects generate, contributing to the now decade-long hiatus in productivity and wage growth.”

“In looking for the root causes of the mess Western economies find themselves in, central banks are up there with the worst of them. So don’t be surprised at populist calls for more overt political control. Central banks are very much part of the perceived ‘establishment’ failure that dominates today’s politics.”

Jacqueline Best of the University of Ottawa, in a paper titled “Technocratic Exceptionalism: Monetary Policy and the Fear of Democracy”, wrote that there was a need to pay attention to the practices of technocratic exceptionalism. This exceptionalism results from the neoliberal idea of protecting the market from too much democracy, she wrote.

The central banking club has taken careful note of the growing dissatisfaction. In 2017, Gordon Brown, the man who gave the BOE its independence, cautioned that “take back control” movements will gain even more support.

Ed Balls, former architect of BOE independence, noted in 2016 that popular discontent towards central banks is growing in the US, UK and the Eurozone. Also in 2016, former British foreign secretary, William Hague wrote that low interest rates and quantitative easing have had a number of negative consequences–ranging from widening inequality to weakened pension funds–that may become “politically explosive” if maintained indefinitely.

In February this year, Howard Davies, former deputy governor of the BOE wrote: “Should central banks regard this renewed disputatiousness as a bad and dangerous thing? They may, if they wish, but I suspect they are pushing water uphill. We have moved into a less respectful age, which is not surprising, given the mistakes made by central banks (and others) in the run-up to the 2008 crisis.”

Fed chairman Jerome Powell has said that voters do not trust public institutions; central banks must become as transparent and accountable as possible if they want to keep their independence. And ECB President Mario Draghi warned that threats to the independence of central banks had emerged as a significant risk.

In Australia, the criticism exists but is less public, partly because of the overwhelming dominance of the neoliberal news media, which serves as a propaganda machine for promoting central bank independence. This machine regularly declared even recently that Australia has full employment, one of the mandates for the RBA, conveniently ignoring the growing ranks of the underemployed and the precariously employed.

But central banking is international and any changes internationally will eventually reach every nook of central banking, including Australia.

How the RBA has changed.

Central bankers are thin-skinned to criticism, being acutely conscious of their privileged position of independence. There has been a perceptible shift in RBA thinking in the past 12 months, reflected in five speeches from governor Lowe.

25 July 2019: Inflation’s receding threat; welfare maximisation the objective.

Inflation was no longer the great threat, governor Lowe said. Low inflation had become the norm in most economies. Inflation targeting was still appropriate – though with an important caveat – the larger objective is “welfare maximisation”. (emphasis added)

29 Oct 2019: Maximum sustainable employment.

“Ultimately, central banking is not only about finance and money; rather, it is about enhancing the economic welfare of the people we serve, primarily through achieving price and financial stability and maximum sustainable employment,” he said. (emphasis added)

26 Nov 2019: New directions in monetary policy.

Fresh from a meeting of the club of world central bankers which he chaired, where he must have heard whispers of concern from central bankers, governor Lowe further distanced the RBA from previous ideas. He said it was not surprising that there is a lot of discussion internationally about the use of so-called “unconventional” monetary policies, focussing on QE as a possible option in Australia when needed.

5 February 2020. On fiscal policy; investing in the future.

There is a need to invest in the future, he said, mentioning “investments in infrastructure, in human capital, in energy production and distribution, in new data technologies, and in measures to deal with climate change and its effects.”

19 March 2020. Headlong into QE without limits; consultations with government.

In consultation with government, the RBA cut the cash rate to 0.25% “until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.” Also, QE without quantitative limits “until progress is being made towards our goals of full employment and the inflation target.”

Part 2: Will the RBA support progressive fiscal policies?

(John Tan was a deputy editor in the Straits Times newspaper in Singapore. He has been foreign editor and business editor.)

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