This is the Bank of Canada's intellectual arrogance - not so much its assertion that central bankers saved the world from catastrophe in the meltdown of 2008 but rather its silence on the role of central bankers in causing the crisis.
In his reflections a couple of weeks ago on the 75th anniversary of the founding of Canada's central bank, Governor Mark Carney said the world's central banks "have not only averted the worst but created the prospect of sustained recovery." Although he conceded that the "reverberations" of the crisis were far from finished, his tone was distinctly triumphant. With "the dire experience of the 1930s" close at hand, central banks acted swiftly and aggressively. Perhaps by the narrowest of margins, they averted disaster.
Central banks are manipulators of markets, routinely doing things (such as fixing prices) that would send other people to jail. They pretend to possess esoteric knowledge. (Mr. Carney spoke of the Bank of Canada's mission as going "to the heart of how modern economies function and, indeed, how human beings behave.") The Wizard of Oz comes to mind. Central banks, of course, are, for the most part, merely departments of government with the same capacity for error as any other - or perhaps, since we're dealing with economics, with a greater capacity.
The fact is that economists - hence, also central banks - can no more know the future than they can know the past. Take the Great Depression itself. Seventy years later, economists still don't really know what caused it. You might think this would be easy. You're looking backward, after all, with vast amounts of information available. Not so.
This frustrates people whose job it is to manage national economies. In 2000 (to cite a single instance of such frustration), the Federal Reserve Bank of Minneapolis gathered together many of America's greatest economists, including Ben Bernanke, current chairman of the U.S. Federal Reserve. The task: Review the alternative theories for the cause of the Great Depression and identify the actual cause. They couldn't do it.
The bank concluded its review of the conference this way: "If the Great Depression is, indeed, a story, it has all of the trappings of a mystery that is loaded with suspects and difficult to solve - even when we know the ending: the kind we read again and again, and each time come up with a different explanation." Here, in an aside, came a moment of illumination: "It may strike some people as odd to describe economists as storytellers, but this is a term they use when discussing themes and ideas." What do economists do? They tell stories - just like L. Frank Baum, Oz being the abbreviation of the basic measure of gold.
Since economists don't know what caused the Great Depression, which is behind us, how can they know what caused the Great Recession, which is still under way? Will this mystery have a surprise ending? Perhaps. Olivier Blanchard, chief economist with the International Monetary Fund, certainly thinks so. He now says central banks themselves were a major cause of the Great Recession - by limiting inflation (in Canada's case) to 2 per cent. We need a 4-per-cent inflation rate, he says, and perhaps a 10-per-cent one.
Why? When the financial crisis hit in 2008, Mr. Blanchard says, central banks had no room left to manipulate key interest rates. They were compelled to take these rates to zero per cent. With a higher rate of inflation, a higher "normalcy," they would have more room. Going from 2 per cent to zero per cent, a central banker has only 200 basis points of manipulation. Going from 10 per cent to zero per cent, a central banker has 1,000 basis points of manipulation.
Mr. Carney presumably considers Mr. Blanchard daft - and most Canadians, now rather proud of their country's economic performance in rough times, would presumably agree. But the relevant point is not Mr. Blanchard's neo-Keynesian plot twist. It's Mr. Blanchard's confession. Two weeks before the market meltdown in 2008, he issued a comforting analysis: The global economy was just fine. Now Mr. Blanchard has apologized - most particularly, he said, for thinking that he and his colleagues "knew how to conduct macroeconomic policy."
In all of their disguises, Wizards of Oz look and sound authoritative - except retrospectively. Based on the historical record, we should listen less to the words of Federal Reserve storyteller Ben Bernanke or Bank of Canada raconteur Mark Carney and more to the words of IMF chief confessor Olivier Blanchard. The markets, after all, still know vastly more than the manipulators of the markets.