Montag, Mai 17, 2010

Turning Bankers Into Crooks...

Clive Crook, that is.

He's got a column in today's FT that richly deserves criticism, as he fails to understand just how he is adding to the problem, rather than subtracting from it.

This statement, for instance, is utter hogwash:

Democracies cannot embrace central-bank independence unreservedly – least of all now. What remains of the case must be based on a contingent weighing of costs and benefits, rather than sharp, principled and ultimately indefensible distinctions.

Sorry, Mr. Crook: you really don't understand why central banks must be independent or they will fail. The reason?

It's really very simple. Given political influence, politics will corrupt the central banks, reducing them to vassals of the politicians.

Central banks, as the organization where economic and financial realities come into direct conflict with political whims and fantasies, must deal with the problems that politicians cause: they are, in effect, the grown-ups at the edge of the playground, ensuring that skinned knees are cleaned and disinfected, that bullies don't run the playground, that everyone gets their turn, that toys are returned, at the end of the day, to those who own them and aren't taken home.

What Mr. Crook envisions is the subservience of central banks to the desperate political machinations of a generation of politicians who have become addicted to the idea that they are actually doing some good - hah! - whilst stealing, as it were, children's milk money.

Mr. Crook confuses as few others can that there is some sort of interplay between the central banks and politicians: that once the central bank strays, as it were, into political territory, that they must therefore be subservient to its masters.

Were that the obverse be true: that politicians were to be subservient to the central bankers when they stray into fiscal policies that require central bank actions to counteract.

Sadly, sadly, this is not the case: nor can a case be honestly made for the subservience of central bankers to politics when it is inconvenient for the politicians to understand that they are the people with a serious dependency - serial deficits show this - and that the central bankers are the sensible ones.

According to Mr. Crook:

Both have proved willing to conduct massive fiscal operations at the behest of treasury ministers. This is not what central-bank independence used to mean. As once understood, the idea is defunct.

By both he refers here to the US Fed and the ECB. But he is mistaken here.

Both the Fed and the ECB are not conducting massive fiscal operations at the behest of treasury ministers. They are conducting them in order to save those treasury ministers and their political jobs from utter and complete ruin. The central bankers are faced with a massive political cesspool and have absolutely no desire to clean things up, preferring instead to turn to those who have been wallowing around in the cesspool to stop thrashing about, we'll help you before the content of the cesspool, so to speak, reaches your ears.

That's not subservience: it is common sense and prudence, qualities that Mr. Crook apparently fails to understand. No central banker worth the name can afford to be anything but extremely practical and results-oriented. Sometimes the means to those results intrudes heavily into the political arena.

As Mr. Crook says:

Monetary policy was thought separable partly because it seemed simpler: all you have to do is control interest rates. But in a crisis monetary policy gets complicated. Quantitative easing erases the line between monetary and fiscal policy altogether. When central banks support troubled borrowers, public or private, they expose themselves to default risk: again, fiscal policy by another name. Such interventions involve choices about who will be protected and who will pay. Those are, or should be, political choices.

Sorry: these are not political choices. The idea that they are shows how thoroughly corrupted Mr. Crook is by politics, as what he is really saying is not that there is a real reason why these should be primarily political choices, but rather that it will be the ruin of political parties if their pet provenances and hobbies are gutted by the appalling errors of fiscal policy they have made.

Most fundamentally, why deny politicians access to the short-term trade-off between inflation and output in the first place? Because they will make a mess of it? Let me count the ways in which politicians might make a mess of things. Why not hand every area of policy over to an unelected group of experts who can be trusted to take the long view, confining politicians, if they are needed at all, to an oversight role?

Sigh. They won't merely make a mess of it: they will corrupt the process, ensuring that the mess will continue. In this case, Mr. Crook, we're not dealing with some nuances of health care coverage or decisions what weapons to buy for what's left of a military, but rather protecting a country's fundamental finances from corruption. That Mr. Crook cannot see this underscores how difficult it is to see when blinded.

Monetary policy in ordinary times is more separable from politics than fiscal policy and there are gains from maintaining some distance. One can say that much. But the balance of advantage depends on circumstances, and the particular country. In emergencies, independence has to give way – and it will, because central banks must bend to political demands at such times, at their own initiative or otherwise.

So central banks must bend because of ... circumstances. Let's give up independence, let's give up freedom, for the sake of convenience. I think Benjamin Franklin had something to say about that, and it was not flattering.

Economists who worry about infringing the independence of the Fed and ECB are right to. When central banks put themselves at the disposal of finance ministries, the results can be calamitous. But in emergencies they cannot stand aside – as the ECB has tried to. The reason is something that simple models of central-bank independence tended to ignore: fiscal incapacity elsewhere in government.

It's not so much that there is fiscal incapacity "elsewhere" in government, but rather that the government itself is fiscal incapacitated. Huge difference, Mr. Crook: the central banks are not part of the government, you see, because they are run not by politicians, not elected or under control, but rather are those who know how the system works and prevents it from being corrupted.

For different reasons, funding was choked off at critical moments in both the US (Congress was unwilling to vote resources at the required scale and speed) and the eurozone (cross-border fiscal transfers are problematic). Governments were unable to deliver adequate stimulus, or provide timely relief to distressed banks and shadow banks. The legislators and treasuries ordinarily responsible for fiscal policy failed, so central banks had to step in.

In other words, the adults showed up.

Where does that leave central-bank independence? Perhaps, as with other challenged orthodoxies, there is a case for revision not repeal. Central banks should avoid outright submission to political direction. That can stand. But sometimes they must cross the blurry line between monetary and fiscal policy, between separation and co-ordination. When they do, they enter into the world of politics. This goes with the territory, and it is pious to claim otherwise.

The let us be pious: they have crossed the line because politics has failed, and failed abysmally. For this the politicians should be rewarded with a say in how things are resolved? It wouldn't be fair otherwise, right?

Economics has nothing to do with fairness. Markets are ruthless and give not a fig for how capital was created, be it through hard-earned accumulation (savings) or inherited by fools: money is money for exactly this reason.

Or does Mr. Crook believe that we should create some sort of fairness doctrine for failed fiscal policies to save the political parties now so apparently in ruins? It would save Labor in the UK and it would save the Democratic Party in the US from the garbage heap of history, from the public display of their failings and the following turning out of the bums at the next elections, that is sure.

Let them lie there where they so richly deserve to lie. The Gods of the Copybook Headings would have it no other way.

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