Chris Giles and Sam Fleming rightly note the growing conflict between central bankers and elected politicians (December 10), but fail to explain how this has come about and how it should be resolved. They note that before 2008 central bank policy limited the “volatility of inflation”, though it then “signally failed to prevent the financial crisis”. There is surely more to be said.
Limiting the volatility of inflation was an important achievement, but it is far from clear that central banks had any control over the inflation rate itself. As Mervyn King has said, they had a “nice environment for monetary policy” because of the downward pressure on world prices from the entry of millions of low-paid east Asian workers into the labour market. The failure of central banks to prevent — or even foresee — the 2008 financial crash stems directly from their acceptance of Eugene Fama’s efficient market theory, which implied that commercial banks needed only light regulation.
Central banks have played a crucial but hardly stellar role in the recovery from the crash. Most of the money pumped into the economy by quantitative easing leaked out into the financial and real estate sectors rather than stimulating the real economy. As your columnist John Kay pointed out ( July 9, 2013), “the one certain consequence of boosting asset prices is that those with assets benefit relative to those without”.
Monetary policy is neither particularly effective nor politically neutral. Since governments, not central banks, are accountable for the results of policy, macroeconomic management cannot be outsourced to central banks. The two arms of policy, fiscal and monetary, need to be integrated. The experiment of independent central banks has to be brought to an end.
Lord Skidelsky FBA
London, SW1, UK
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