Editorials

Central banks under attack

Every credible economic forecaster anticipates a global slowdown. The final communique from the Group of 20 summit last month in Osaka noted that “growth remains low” and “risks remain tilted to the downside.” The dangers are many: trade wars, real wars, geopolitical risk, real estate bubbles, mounting government debt and rising inequality with the associated political instabilities that it creates.

In this environment, the world needs a strong and capable economic management. Rarely are prime ministers and presidents economists, but it is not too much to require that background of finance ministers, central bankers and economic advisors. The top positions at international financial institutions should be similarly occupied.

Instead, the professionals are under assault. Mexico’s finance minister abruptly resigned this week, charging his boss, President Andres Manuel Lopez Obrador, and his government with making uninformed and speculative decisions. In Turkey, President Recep Tayyip Erdogan recently fired the head of the central bank because he refused to cut interest rates; Erdogan has declared that interest rates are “the mother of all evil.” In India, the central bank has lost three governors in three years, two in less than a year: Gov. Urjit Patel resigned last December and Vice Gov. Viral Acharya suddenly stepped down last month after warning last October about the impact of attacks on the bank’s independence.

U.S. President Donald Trump has called the Federal Reserve “our most difficult problem” and has shown no hesitation about voicing his displeasure with Jerome Powell, chairman of the Federal Reserve (whom Trump himself selected), for keeping interests rates too high, which, Trump claims, threatens to throttle the U.S. economy. Meanwhile, the Italian government is contemplating legislation that would give it more power over appointments of members to the Bank of Italy.

In each case, the government’s complaint is that the central bank is too independent and that it is making decisions that undercut the economy. In some cases, the basis for the criticism is wacky. For example, Erdogan believes that high interest rates cause, rather than combat, inflation. In other cases, insidious motives are at work: Central banks oversee a country’s banks and corrupt officials and individuals are threatened by efficient and capable regulators. In most cases, however, government officials are expressing anger and indignation that central bankers are not focused on the government’s popularity ratings or the timing of the next election.

That is a good thing. Only when they are shielded from political interference can central bankers act in ways that protect the long-term health of the country rather than that of a particular administration. Political decisions produced rampant inflation in the 1960s and ’70s, and prompted central bankers to fight for and win real independence, as occurred in the United States and the United Kingdom. The European Central Bank was given independence when it was established in 1998.

Since then, the tide has shifted. That may seem unusual in the aftermath of the 2008-2009 global financial crisis, when a catastrophic downturn was averted by quick-reacting central bankers and finance ministers. But the crisis discredited much of the prevailing regulatory framework — especially the Anglo-Saxon preference for laissez-faire practices — and the wave of populist politics that followed further tarred the reputations of economic experts. Politicians who purport to represent the will of the public have no need for technocrats who say “no.”

In Japan, a tenet of Abenomics has been coordination between the government and the Bank of Japan. When he returned to office at the end of 2012, Abe secured the resignation of Gov. Masaaki Shirakawa so that Haruhiko Kuroda could assume the post. In contrast to his predecessor, Kuroda backed the historical quantitative easing program that was one of Abenomics’ “three arrows.” The BOJ’s unprecedented efforts to reflate the economy have continued, but deflationary pressures persist. Some critics worry that the program, even if well-intended, has compromised the central bank’s independence and left it with few tools in the event of another crisis.

The BOJ’s easing, along with negative interest rate policies, is part of a larger redrawing of lines between fiscal and monetary policies — a process that has pushed central banks into new roles. They are assuming power and influence previously held by elected legislatures. Yet this is because politicians have been in many cases such poor stewards of their national economies — promising programs and benefits without ensuring that they are paid for — that central bankers have been forced to intervene.

While there are legitimate questions to be asked about central bankers’ new authority and influence, these individuals nevertheless must be capable and competent. That fundamental requirement assumes ever larger importance as warning signs mount and the prospect of a crisis looms on the horizon.