This month UK Prime Minister Theresa May warned the Bank of England that its policies had damaged the interests of savers, pensioners and the young. The Governor, fresh from campaigning against Brexit, fired back
‘The objectives are what are set by the politicians. The policies are done by technocrats. We are not going to take instruction on our policies from the political side.’
It may be a good idea to have an independent central bank. Such a body existed in previous times – it was called gold. But once politicians learned how to avoid the disciplines of this global regulator they had to replace it with something else that would prevent them cutting the corners off rounded coins, requiring all citizens to accept the currency they thereby debased and causing economic stagnation.
Central banks offered a buffer against the natural proclivities for theft that seem to be part of the DNA of all but a handful of those seeking political office (sadly with the resignation of Senator Bob Day we have just lost a rare exception). But, as always seems to be the case, governments started appointing people to these positions who they thought could craftily re-organise the operations of the economy to their own advantage. Central bankers would therefore inject funds into the economy by selling government paper to target some inflation rate greater than zero. This allowed money illusion to be used to fortify politicians’ wherewithal to spend on programs they said were in the public interest. Whether or not they were in the public interest, such policies were clearly in politicians’ own interests because it is less obviously painful to get funding to bribe voters surreptitiously rather than demanding it up-front.
But that program of gentle theft has long since gotten out of hand culminating in the great monetary injections to counteract the 2008 recession, itself stemming from the gradual effects of monetary growth. As a result, governments have doubled down, progressing beyond having central bankers conspire in small scale larceny. They have come to see “positive” policies by central banks as being the key to reigniting economies that are stagnating as a result of the failure of previous monetary and fiscal injections. Janet Yellen at the Fed is just the worst of a line of predecessors and of her counterparts’ policies in other countries.
The UK has done relatively well among OECD countries in spite of having one of the most wasteful green energy policies. Its success, in no small measure, was due to a halting of money growth for the five years up until the end of 2015. There was no US style quantitative easing, until the present Governor had settled himself into the job; in 2016, he used the excuse of counteracting Brexit, to engineer a money expansion at 15 per cent plus. And, judging by the decline in the value of sterling, he did not succeed in his own objective (doubtless, like other monetary and fiscal stimulators he will argue that the counterfactual would have been even worse).
May’s needling of the Governor of the BoE is unusual in that it criticises him for being too lax rather than being insufficiently “accommodating”.
The best solution for spending and monetary policy is to have democracy corralled so that it does not give free goods to voter alliances or to those who’d furnish support for particular political coalitions. We have not discovered how to do this.