Central Bankers' Desperate Grab for Power
Central Bankers' Desperate Grab for Power
Eli Christman / CC BY 2.0
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.
Ellen Brown
Ellen Brown is an attorney, chairman of the Public Banking Institute, and
author of thirteen books including her latest, "Banking on the People:
Democratizing Money in the Digital Age."
