SEPT 17, 2019
Central bankers are
out of ammunition. Mark Carney, the soon-to-be-retiring head of the Bank of
England, admitted as much in
a speech at the annual meeting of central bankers in Jackson Hole,
Wyo., in August. “In the longer-term,” he said, “we need to change the game.”
The same point was made by Philipp Hildebrand, former head of the Swiss
National Bank, in a recent interview with
Bloomberg. “Really, there is little if any ammunition left,” he said.
“More of the same in terms of monetary policy is unlikely to be an appropriate
response if we get into a recession or sharp downturn.”
“More of the same” means
further lowering interest rates, the central bankers’ stock tool for
maintaining their targeted inflation rate in a downturn. Bargain-basement
interest rates are supposed to stimulate the economy by encouraging borrowers
to borrow (since rates are so low) and savers to spend (since they aren’t
making any interest on their deposits and may have to pay to store them). At
the moment, over
$15 trillion in bonds are trading globally at negative interest rates,
yet this radical maneuver has
not been shown to measurably improve economic performance. In
fact, new
research shows that negative interest rates from central banks, rather
than increasing spending, stopping deflation and stimulating the economy as
they were expected to do, may be having the opposite effects. They are being
blamed for squeezing banks, punishing savers, keeping dying companies on life
support and fueling a potentially unsustainable surge in asset prices.
So what is a central banker to
do? Hildebrand’s proposed solution was presented in a paper he wrote with three
of his colleagues at BlackRock, the world’s largest asset manager, where he is
now vice chairman. Released in August to coincide with the annual Jackson Hole
meeting, the paper was co-authored by Stanley Fischer, former governor of the
Bank of Israel and former vice chairman of the U.S. Federal Reserve; Jean
Boivin, former deputy governor of the Bank of Canada; and BlackRock economist
Elga Bartsch. Their
proposal calls for “more explicit coordination between central banks
and governments when economies are in a recession so that monetary and fiscal
policy can better work in synergy.” The goal, according to Hildebrand, is to go
“direct with money to consumers and companies in order to enliven consumption,”
putting spending money directly into consumers’ pockets.
It sounds a lot like “helicopter money,”
but he was not actually talking about raining money down on the people. The
central bank would maintain a “standing emergency fiscal facility” that would
be activated when interest rate manipulation was no longer working and
deflation had set in. The central bank would determine the size of the facility
based on its estimates of what was needed to get the price level back on
target. It sounds good until you get to the part about who would disburse the
funds: “Independent
experts would decide how best to deploy the funds to both maximize
impact and meet strategic investment objectives set by the government.”
“Independent experts” is
another term for “technocrats”—bureaucrats chosen for their technical skill
rather than by popular vote. They might be using sophisticated data, algorithms
and economic formulae to determine “how best to deploy the funds,” but the
question is, “best for whom?” It was central
bank technocrats who plunged the economies of Greece and Italy into
austerity after 2011, and unelected technocrats who put
Detroit into bankruptcy in 2013.
Hildebrand and his co-authors
are not talking about central banks giving up their ivory tower independence to
work with legislators in coordinating fiscal and monetary policy. Rather,
central bankers would be acquiring even more power, by giving themselves a new
pot of free money that they could deploy as they saw fit in the service of
“government objectives.”
Carney’s New Game
The tendency to overreach was
also evident in Carney’s Jackson
Hole speech when he said, “we need to change the game.” The
game-changer he proposed was to break the power of the U.S. dollar as global
reserve currency. This would be done through the issuance of an international
digital currency backed by multiple national currencies, on the model of
Facebook’s “Libra.”
Multiple reserve currencies
are not a bad idea, but if we’re following the Libra model, we’re talking about
a new, single reserve currency that is merely “backed” by a basket of other
currencies. The questions then are who would issue this global currency, and
who would set the rules for obtaining the reserves.
Carney suggested that the new
currency might be “best provided by the public sector, perhaps through a
network of central bank digital currencies.” This raises further questions. Are
central banks really “public”? And who would be the issuer—the banker-controlled
Bank for International Settlements, the bank of central banks in Switzerland?
Or perhaps the International Monetary Fund, which Carney happens
to be in
line to head?
The IMF already issues Special
Drawing Rights to supplement global currency reserves, but they are merely
“units of account” which must be exchanged for national currencies. Allowing
the IMF to issue the global reserve currency outright would give unelected
technocrats unprecedented power over nations and their money. The effect would
be similar to the surrender by European Union governments of control over their
own currencies, making their central banks dependent on the European Central
Bank for liquidity, with its disastrous
consequences.
Time to End the “Independent”
Fed?
A media event that provoked
even more outrage against central bankers in August was an op-ed in
Bloomberg by William Dudley, former president of the New York Federal Reserve
and a former partner at Goldman Sachs. Titled “The
Fed Shouldn’t Enable Donald Trump,” it concluded:
There’s even an argument that
the [presidential] election itself falls within the Fed’s purview. After all,
Trump’s reelection arguably presents a threat to the U.S. and global economy,
to the Fed’s independence and its ability to achieve its employment and
inflation objectives. If the goal of monetary policy is to achieve the best
long-term economic outcome, then Fed officials should consider how their
decisions will affect the political outcome in 2020.
The Fed is so independent
that, according to former Fed chair Alan Greenspan, it is answerable to no one. A
chief argument for retaining the Fed’s independence is that it needs to remain
a neutral arbiter, beyond politics and political influence; and Dudley’s op-ed
clearly breached that rule. Critics called it an
attempt to overthrow a sitting president, a treasonous would-be coup that
justified ending the Fed altogether.
Perhaps, but central banks
actually serve some useful functions. Better would be to nationalize the Fed,
turning it into a true public utility, mandated to serve the interests of the
economy and the voting public. Having the central bank and the federal
government work together to coordinate fiscal and monetary policy is actually a
good idea, so long as the process is transparent and public representatives have
control over where the money is deployed. It’s our money, and we should be able
to decide where it goes.
