The Western world’s central banks have amassed unprecedented power and responsibility since the 2008 financial crisis. Power naturally attracts criticism, some of which was directed at the Bank of England’s Governor, Mark Carney, to the point he was considering hitting the road.
After a guessing game that lasted weeks, Mr. Carney on Monday evening announced he would stay until the end of June, 2019, the year Britain is to leave the European Union. But he declined to serve a full eight-year term, which would have taken him to 2021.
The announcement came shortly after Prime Minister Theresa May, apparently aware that an early departure by Mr. Carney would rattle markets already shaken by Brexit, endorsed Mr. Carney.
For Mr. Carney to have bolted now would have left a job – minimizing the economic damage to Brexit-bound Britain – only half-done.
It would have exposed Mr. Carney as thin-skinned, a nice-guy Canadian who got too easily upset by the tough guys in the bear pit of British politics and media. As Michael Hewson of CMC Markets noted on Monday, “It is justifiable that his actions should come under scrutiny and, unfortunately, being a central banker, criticism tends to come with the territory.”
Mr. Carney, a former Goldman Sachs banker who was governor of the Bank of Canada before swapping Ottawa for Threadneedle Street in 2013, had been set up as a punching bag by several prominent, pro-Brexit Conservatives. They wanted his scalp for, in their view, having sided with the anti-Brexit camp ahead of the June referendum. Even Ms. May had taken a swipe at Mr. Carney, albeit an indirect one.
Apparently, it’s open season on central bankers pretty much everywhere. Republican presidential nominee Donald Trump has gone after U.S. Federal Reserve chairwoman Janet Yellen, accusing her of holding down interest rates for political reasons; he has pledged to fire her if he is elected.
European Central Bank president Mario Draghi has endured a near-constant barrage of criticism from certain members of the German government and the Bundesbank, the German central bank, for his lavish quantitative-easing program, the ECB’s zero-to-negative interest-rate policy and other exotic crisis-fighting methods. The all-powerful German finance minister, Wolfgang Schaeuble, went so far as to blame the rise of the right-wing populist party, Alternative fur Deutschland, on the ECB’s rock-bottom interest rates.
In Tunisia in 2012, the Islamist government fired Mustapha Kamel Nabli, a well-respected former World Bank economist, for asserting his independence as central bank governor. Getting rid of him did the Tunisian economy no favours.
Mr. Hewson is right: Criticism does come with the territory.
It wasn’t long ago that central bankers were essentially government-appointed stooges whose unwritten instructions were to help the government win elections, first, and deal with inflation and financial stability, second. In 1929, the then-governor of the Bank of England, Montagu Norman, said he enjoyed his unique right to offer advice to the government, “but always of course subject to the supreme authority of the government.”
Britain rode the inflation roller coaster for decades and suffered a humiliating sovereign bailout 40 years ago, making it the Greece of its era. The Bank of England’s independence was not actually guaranteed until 1997, when then-chancellor of the exchequer Gordon Brown decided that politicians should not be able to manipulate interest rates to their advantage.
The ECB, since its inception in 1998, has always been independent and largely transparent.
Central banks changed after the financial crisis. Even as they were duly criticized for not anticipating the bank– and economy-wrecking crisis, they were endowed with extraordinary powers to prevent deflation, stimulate the economy and fix the shattered banks.
In came quantitative easing, plummeting interest rates and unconventional instruments, such as the ECB’s outright monetary transactions, which would give the ECB the ability to buy in unlimited quantities the sovereign bonds of any country on the verge of getting shut out of the debt markets. The banking system in effect became a subsidiary of the ECB, which managed the interbank lending rates, flooded the banks with liquidity and hit them with tight regulations.
“We have never seen central banks hold such a grip on the banking market,” Thomas Mayer, founding director of Germany’s Flossbach von Storch Research Institute and Deutsche Bank’s former European economist, said in a recent interview with The Globe and Mail.
Of course, not all of these policies met with the approval of politicians, as Mr. Carney, Mr. Draghi and Ms. Yellen would find out. Mr. Carney has taken considerable amounts of abuse, not so much because of his easy-money programs but because he dared to say that Brexit might pose a serious threat to the economy. (Ms. May, however, did take a swipe at his easy-money policies, saying the programs helped the rich more than the poor.)
His warnings enraged the Brexiteers, who accused him of sacrificing his neutrality and effectively joining the “Project Fear” camp – the anti-Brexiteers who argued that leaving the EU could wreck the British economy. A few prominent Conservative Brexiteers, among them Lord Nigel Lawson, a former chancellor of the exchequer, called for Mr. Carney’s head. They got all the more angry when Mr. Carney’s prediction proved wrong, or at least premature. So far, the British economy has not fallen out of bed.
Mr. Carney did nothing wrong. The Bank of England had a duty to examine the implications of Brexit, a seismic economic change for Britain, on inflation and financial stability. And just because he has been wrong so far does not mean Brexit won’t hurt Britain. The terms of the UK’s departure from the EU have yet to be defined; it is still a great leap into the unknown.
If central bankers are given a lot of power over an economy and its banking system, the politicians should not be surprised if they use it. At the same time, central bankers should not be surprised if their power and actions are sometimes criticized. But, above all, the politicians should consider the irony of their threat to do away with central bankers’ independence unless those bankers obey the politicians.Report Typo/Error