MUCH ADO ABOUT CENTRAL BANKERS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS

Much ado about central bankers


By Martin Wolf

Published: July 2 2009 18:42

Will no one rid me of this turbulent central banker? Gordon Brown, the UK’s prime minister, may be asking just that when he learns of yet another critical comment from the governor of the Bank of England. For Henry II, king of England in the 12th century, the troublemaker was Thomas Becket, his own choice as archbishop of Canterbury. For Mr Brown, it is Mervyn King, whom he has reappointed to an equally impregnable position. The parallel is clear: central bankers are cardinals in the cult of monetary stability.

Becket was murdered. Mr King will not suffer that fate. But a later king of England brought the church and his archbishops to heel. Could the Bank suffer a similar fate?

Indeed, one of the results of this crisis is to imperil central bank independence, not just in the UK. This is so for three reasons: at close to zero official interest rates, the boundary between monetary and fiscal policy erodes; governments are running huge fiscal deficits, particularly in the UK and the US, which threaten monetary stability; and, finally, those in charge wish to divert blame for the disaster.
Indeed, Mr King is not the only central banker to be under attack. US legislators savaged Ben Bernanke, chairman of the Federal Reserve, over his role in Bank of America’s takeover of Merrill Lynch. Astonishingly, Angela Merkel, chancellor of Germany, has directly attacked unconventional policies, including those pursued by the European Central Bank.

Turbulent times produce turbulent central bankers and turbulence over central banking. The question, particularly in the UK, where central bank independence is so fragile, politics so tumultuous and times so tough, is how central bankers should act. My view is: with caution, but not under a vow of silence.

Mr King has made four points, all critical of the government: first, contrary to the views of the Treasury, “if banks are thought too big to fail, then . . . they are too big”; second, the Bank of England has “a new statutory authority for financial stability . . . [But] it is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials”; third, he has not been consulted on the forthcoming financial services white paper; and, last, as he told the Commons Treasury committee: “If the economy were to recover along the path assumed in the Budget projections of GDP then I think the time over which deficits need to be reduced is likely to have to be faster than was implied by [the Budget] projection.”

Let us start with a simple question: is the governor correct on the substance? The answers are: yes, yes, yes and yes. While size is not the sole consideration, private businesses must not operate freely if they are not subject to the fear of bankruptcy. Similarly, it is not only necessary for power to align with responsibility, but the Bank of England, the body whose focus is on the economy as a whole, is best suited to exercise “macroprudential” controls over the financial system.

Again, if true, it seems incredible that the governor of the Bank should not have been consulted on the forthcoming white paper. Above all, only Mr Brown and those closest to him deny what is obvious: the fiscal position, with a deficit of 14 per cent of gross domestic product forecast by the Organisation for Economic Co-operation and Development for 2010, is radically unsustainable. Big spending cuts and tax increases, relative to GDP, are inevitable.

So the issue is whether it is the business of the governor to make his views public, particularly on such politically sensitive terrain. Should he not be “economical with the truth”, following Alan Greenspan, former chairman of the Fed, in studied ambiguity? In normal times, the answer is yes. But in the dire circumstances of the day, it is surely better to have the big disagreements out in the open than buried.

True, the politicisation of the independent central bank is potentially very dangerous. The Bank’s still-limited independence may be compromised or even overturned. Moreover, at a time when co-operation among the authorities is essential, the appearance of disarray is itself damaging to confidence. Yet, against these powerful considerations, a responsible public official has to decide whether a particular issue has become so important that bringing his views into the open has become the only patriotic thing to do.

In the case of the UK’s fiscal position at least, it surely is. We are not talking here of modest deficits, but of a yawning chasm, one that could well compromise monetary stability. Furthermore, the UK no longer has credible fiscal rules or procedures, while the prime minister is denying the implications of his own government’s fiscal projections.

Given this irresponsible behaviour, the governor should be allowed to speak. The prime minister may well hate his turbulent central banker. But the country is no politician’s property. Central bankers should always be careful. But this does not mean they should never speak out. Today, they have a duty to do so.

Copyright The Financial Times Limited 2009