From the deserts of Sudan to the gardens of Japan, governments are hitting central bankers with something a good deal harder than a rhythm stick. It really is beginning to look as if, in the long run, they aren’t independent at all.
Back in 2010, President Cristina Fernandez de Kirchner fired the boss of Argentina’s central bank. And why? Because the bank’s top man, a certain Martin Redrado, refused to sanction printing money to buy $6.6 billion of the Argentine government’s debt. Ms Fernandez said that Redrado: “Failed to fulfil the duties of a public servant”.
Not everyone was impressed. Some found themselves suggesting that the Argentinean government was not acting entirely properly.
Then again, bear in mind that this idea of an independent central bank is a pretty new-fangled idea. Of course, in Germany the principle has been sacrosanct since the end of the last world war. In the US it is sort of sacrosanct. The Fed is meant to target both inflation and growth. But if you read Alan Greenspan’s book, ‘The Age of Turbulence’, you will know that he was hauled up in front of the White House every time the Fed chose to act in a way that was not considered to be supportive of the US President’s popularity in the polls.
Bear in mind also, that until the point that Gordon Brown was Chancellor, the job of setting interest rates was, in fact, down to the chancellor. Creating an independent central bank is considered to be the most important thing that Brown did. You may remember that, at the time, the previous occupant of 11 Downing Street –Ken Clarke – was very vocal in his criticism of Brown’s move.
But these days, the principle of an independent central bank seems to be pretty much enshrined – maybe not in law, but in culture. The markets will punish any hint of a government trying to influence its central bank.
And so often you hear from George Osborne that austerity is necessary, because, without it, the Bank of England may choose to up interest rates.
And yet the government chooses to add one more person to the flow of immigrants into the UK, and appoints a Canadian to run the Bank of England, so keen is it to bring someone in who is not steeped in the bank’s culture. You could say the government wants to tackle group think at the Bank of England. But it is interesting to note that Mark Carney is very much in the forefront of the debate about changing a central bank’s targets from inflation to nominal GDP (that’s growth without allowing for inflation).
Such a change could be very important. Let’s assume the Bank of England targets nominal GDP growth of 5 per cent. At the moment, growth is pretty close to zero. It was negative in Q4 2011, and Q1 and Q2 2012, positive in Q3 and will probably be negative again in Q4. So if growth is zero and the target for nominal GDP growth is 5 per cent, that means the Bank’s job will be to deliberately try to create 5 per cent inflation.
I said above that such a change could be very important. As it happens I have doubts as to how effective the change will be. I still believe that in current conditions it would prove very difficult for a central bank to create inflation, even if it wanted to. Besides, with inflation outpacing wage growth, it does appear as though the key to actually creating economic growth lies in reducing inflation. So I’m not sure that a nominal growth of target of 5 per cent is such a good idea.
But the real point is that the UK government has appointed a man who appears to be very sympathetic to ideas that may well improve the chances of the government winning the next election. You may, of course, think this is how it should be; that in a democracy the government should control monetary policy.
But looking beyond the UK, I note that in Japan, just days after the election of a new government, the central bank has announced more QE. The Bank of Japan has lost any pretence of having independence. It dances to a tune played by the government. In fact the Bank of Japan’s Governor, Masaaki Shirakawa, has repeatedly warned that more QE may push up long term interest rates.
And finally, moving away from central banks, I note too that the government wants a bigger say in the appointment of top civil servants. Last month David Cameron blocked the appointment of David Kennedy, who is Chief Executive of the climate change committee, from becoming permanent secretary at the Department of Energy and Climate Change because of his “green” views.
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