The Temptation of the Central Bankers

WASHINGTON, DC – The banking system has become most central bankers’ Achilles’ heel. This may seem paradoxical – after all, the word “bank” is in their job description. But most people currently at the top of our central banks built their careers during the 1980’s and 1990’s, when the threat of inflation was still very real, so this – rather than bank regulation and supervision – remains a major focus of their intellectual and practical concerns.

Moreover, a formative experience for many central bankers over the past half-decade has been the need to prevent a potential collapse of output, including by preventing prices from falling. They have achieved this goal largely by propping up credit, regardless of what that may do to the banking sector’s structure or incentives.

It is not surprising that today’s central bankers continue to be deferential to those who run large private-sector banks. Central banks have a great deal of control over an economy’s money supply, and they can affect interest rates across a wide range of loans and securities. But private-sector banks do the lending, while also bearing responsibility for important dimensions of how financial markets operate.

Thus, keeping global megabanks in business and highly profitable has become a key objective for policymakers in the United States, Europe, and many other countries. All too often, however, this means that central bankers defer to these firms’ executives.