Central Banks vs. Governments

It is becoming increasingly clear that politicians around the world are beginning to wake up to the lasting scars of the financial and economic crisis, wish it had never occurred, and are seeking someone else to blame. In many countries, that someone is the central bank.

These notionally independent organisations are coming under increasing pressure. Some of it is justified, but much is simply an attempt to pass the buck.

The days of imperious central banking are gone. That is probably one step forward. But having central banks under constant pressure from politicians, or unable to do or say what they feel is right represents two steps back. Examples abound, globally:

As Mure is reporting today, the Bank of Japan has given way to political pressure and introduced new three-month liquidity support operations to banks already flush with liquidity. Masaaki Shirakawa, the BoJ governor calls it, “quantitative easing in the broad sense that we are trying to ensure banks are not faced with (liquidity) constraints”. But he is not creating central bank money to buy assets, such as government bonds, as the BoJ did earlier this decade. So it is not really quantitative easing in any strict or historically relevant Japanese sense.As Krishna has argued, in the US the Federal Reserve is coming under extreme pressure from Congress and the administration, more sympathetic to the central bank than lawmakers, might be powerless to resist. Necessary reforms to the Fed’s governance and operations are falling by the wayside in the desire to cut the institution down to size.The European Central Bank is beginning to send signals that it wants to start the exit from its extraordinarily loose monetary policy, as Ralph has reported. But it feels it is treading on eggshells, when the International Monetary Fund insists it is better to err on the side of to much rather than too little stimulus. Eurozone governments are siding with the Fund, so whether of not you think the ECB is right to search for the exit, its ability to do so is constrained.In the UK, the Conservative leader called for an end to quantitative easing in his party conference speech, a position the party has subsequently quietly retracted. The speech did not, however, make things easy for the Bank. And the government has been so critical of the Bank’s handling of financial stability that it refused to give it a role in macro-prudential policy when it launched its consultation paper on financial regulation in the summer. This has led to the absurd situation in which the Bank publishes a very thoughtful discussion document on the nitty-gritty of macroprudential regulation but has to deny any ambition whatsoever in wanting additional tools to manage both inflation and financial stability risks. Mervyn King, Bank governor, was genuine and contrite when he told a House of Lords committee last week: “I do not want to make any pitch at all for any turf or territory”.
Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.