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Central Bank Exits, Now’s The Moment To Decide

In activist circles there is excitement that central bankers might rule the post-crisis economic world and exercise new powers with a bigger toolkit. What was temporary or tacit during the emergency would henceforth be ‘new normal’. Central banks will routinely make systemically-relevant loans and employ smart discretion in their purchase and disposal of gigantic combinations of assets. They will actively undertake new responsibilities for macroprudential and microprudential financial regulation. And they will target other goals, not just price stability or the inflation rate, but employment levels and … shiver … The Golden Fleece and El Dorado of economic goals - GDP growth itself.

1. Fabulous and Frightening

The prospect of enormously expanded central bank functions looks fabulous to some, but frightening to others. The notion that in pursuit of growth and job creation monetary policy could substitute for real economy -- i.e. timeless policies and rules that stimulate competitive production and exchange of goods and services -- can appear deplorably fanciful and dangerous. A Chicago economist was noticed to have muttered into his 2012 PhD Class Reading List that “central banking really is the last refuge of central planners”. That’s true if one considers that in spite of what Keynesians and market monetarists want the public to think, there's been no fundamental change in the economic world to justify the radical experimentation with monetary activism. Not surprisingly, therefore, the old battle between central planning and market allocation still applies. The visions got dressed in fancy new clothes, but only the forms of economic life changed, not the substance. 

Since their extra tools and responsibilities overlap with regular government functions like fiscal and regulatory policy, the non-partisan hard-fought independence of central banks could appear under threat. Institutionally, in fact, it may not be an issue of central banks losing ground to politicians. Elected governments may be shedding integral state powers to unaccountable central banks. In the great oak tree of democratic society, why fret about State Snooping when present dangers are the Dangerously Drooping vital branches of your State.