HEARD ON THE STREET
January 8, 2013, 10:45 a.m. ET
Not-So-Independent Central Banks
By SIMON NIXON
It was only ever going to be a matter of time before the merits of central bank independence were called into question. Now double Nobel Prize winner Joseph Stiglitz has fanned the debate by arguing in a speech last week that countries with less independent central banks such as India, China and Brazil performed far better than economies with more independent central banks such as the U.S. and euro zone. This, he said, shows that the "desirability of central bank independence is questionable at best."
Mr. Stiglitz is of course right that many central banks performed badly during the boom. But was this really because the U.S. Federal Reserve lacked any workers' representatives on its board, or because central banks saw themselves as accountable only to Wall Street? Or was it because central banks, in common with almost the entire mainstream economics establishment, became blinded by a flawed conventional wisdom that almost entirely ignored the role of finance in the economy? The reality was that central banks simply failed to spot the risks arising from the biggest debt bubble in history.
The suspicion is that talk of ending central bank independence or abandoning strict inflation targets—an idea recently floated by Bank of England Governor-elect Mark Carney—is simply code for trying to inflate away those debts, if necessary through even more determined money-printing. Certainly central banks across the developed world—most notably the Bank of Japan—are under growing pressure to deploy an ever wider range of unconventional policies to revive economic growth.
Yet this pre-supposes that central banks do indeed possess the tools to revive growth. This increasingly looks like one of the great fallacies of pre-crisis economic thinking, so far largely disproved by events. Most central bankers rightly argue they can do no more than buy time for politicians to take the real measures necessary to revive growth: reduce and, where necessary, restructure debts; recapitalize banks and overhaul the economy to make it more competitive and productive.
Even so, Mr. Stiglitz is right that independent central banks are not nearly as independent as supposed. Faced with the reluctance of politicians to take tough decisions needed to revive growth, they have ended up with little choice but to keep financing ever large amounts of government debt. Even the European Central Bank, which is accountable to 17 governments and so better able to resist political pressure than others, has been effectively financing governments via support for the banking system.
What seems certain is that, independent or not, central banks will come under growing pressure this year to expand their money-printing activities if growth remains elusive. Many investors believe that inflation is yesterday's problem. That theory may yet be tested.
Mr. Stiglitz is of course right that many central banks performed badly during the boom. But was this really because the U.S. Federal Reserve lacked any workers' representatives on its board, or because central banks saw themselves as accountable only to Wall Street? Or was it because central banks, in common with almost the entire mainstream economics establishment, became blinded by a flawed conventional wisdom that almost entirely ignored the role of finance in the economy? The reality was that central banks simply failed to spot the risks arising from the biggest debt bubble in history.
The suspicion is that talk of ending central bank independence or abandoning strict inflation targets—an idea recently floated by Bank of England Governor-elect Mark Carney—is simply code for trying to inflate away those debts, if necessary through even more determined money-printing. Certainly central banks across the developed world—most notably the Bank of Japan—are under growing pressure to deploy an ever wider range of unconventional policies to revive economic growth.
Yet this pre-supposes that central banks do indeed possess the tools to revive growth. This increasingly looks like one of the great fallacies of pre-crisis economic thinking, so far largely disproved by events. Most central bankers rightly argue they can do no more than buy time for politicians to take the real measures necessary to revive growth: reduce and, where necessary, restructure debts; recapitalize banks and overhaul the economy to make it more competitive and productive.
Even so, Mr. Stiglitz is right that independent central banks are not nearly as independent as supposed. Faced with the reluctance of politicians to take tough decisions needed to revive growth, they have ended up with little choice but to keep financing ever large amounts of government debt. Even the European Central Bank, which is accountable to 17 governments and so better able to resist political pressure than others, has been effectively financing governments via support for the banking system.
What seems certain is that, independent or not, central banks will come under growing pressure this year to expand their money-printing activities if growth remains elusive. Many investors believe that inflation is yesterday's problem. That theory may yet be tested.
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