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What makes for good central banking? Mervyn King’s response to this question is recalled with fondness by governors. In a delightful lecture in Plymouth more than a decade ago, he said that the Bank of England should aspire to be boring, for the simple reason that “boring is best”.
What a difference the financial crisis has made. During the past couple of years, a period during which I chaired the governing board of the Swiss National Bank, central bankers have found themselves routinely criticised, vilified and attacked for all sorts of things. Being boring was not one of them.
Those who argue these policies were unnecessary or have planted the seeds of a greater future crisis are as wrong as the “liquidationists” of the Great Depression. The global economy was on the edge of the abyss in 2008. If central banks had failed to overcome their inherent bias for boredom, the global consequences would have been dire at best and catastrophic at worst.
Instead, the worst of the fallout from the crisis appears to be behind us. Does this mean that Sir Mervyn and his colleagues can once again embrace a “boring is best” philosophy any time soon?
The answer is a resounding “no”. Quantitative easing in the US and UK and liquidity provisions by the European Central Bank have above all bought time. Central bankers have built an immense life raft to save us all from drowning. They must now demonstrate the same courage and determination they deployed so effectively during the crisis and do everything they can to ensure that others are equally bold and take the actions required to bring the raft safely to shore.
Governments must create credible and long-term plans for fiscal consolidation. In parallel, they must implement specific policies to foster growth. Austerity alone cannot be the answer. Nowhere is this more apparent than in the eurozone. Banks, especially European banks, must be encouraged or, if necessary, forced by their regulators to strengthen their balance sheets. In some cases this may require public money. This is a prerequisite – not an impediment – to efficient credit flows into the real economy.
Central bankers face an arduous task. During the crisis, they were able to resort to policy measures that resided largely within their own statutory mandates, even if those mandates had to be stretched to breaking point. At some point, central banks will have to unwind their extraordinary policy measures to safeguard price stability. But right now, what needs to be done to land the emergency life raft safely is well beyond the direct authority of central banks. Now is the time for governments, parliaments and bank supervisors to rise to the occasion.
If they fail to do so, the critics who claim that central bankers merely planted the seeds of the next crisis will sadly appear to have been right after all; not because central bank policies during the crisis were inappropriate, but because politicians failed to recognise them for what they were: extraordinary measures to avert the worst case and buy time.
During the crisis, central bankers displayed great courage in action. Now they require a different kind of courage. Think of it as the courage of the pulpit or the courage of conviction. Central bankers must take advantage of their decisive contribution to preventing the collapse of the western financial system. They must use this accumulated credibility to demand that politicians and officials muster their own courage to do the necessary repair work on the global financial system and economy. This will put central banks in a tough and often very unpleasant spot. The more the sense of imminent danger recedes, the more difficult the job will become. Still, they must persevere.
Boring central banking is unlikely to return anytime soon. Nor should it. The battle-hardened central bankers who are in charge today are well-suited to continue the fight for sustainable repair of the global economy and insist that others do their part. Let’s hope the central bankers have the stamina for it. They’ve had a bruising and exhausting four-and-a-half years.
Some years ago, one of my predecessors gave me a bit of well-intentioned and earnest advise: “If you want to maximise your chances of one day becoming governor, remain quiet and do nothing!” That may still be sound bureaucratic career advice. It is also decisively the wrong mindset for today’s and indeed tomorrow’s central bank governors.
The writer is a senior visiting fellow at Oxford University and the former chairman of the Swiss National Bank