A welcome defence of central bankers
Few tears are ever shed for bankers and Raghuram Rajan’s note “Central banks are the fall guys” is a brave attempt to fight their corner
Fighting the central banks' corner
Few tears are ever shed for bankers, and the same is probably true of central bankers. Consequently, Raghuram Rajan’s note “Central banks are the fall guys” is a brave attempt to fight their corner. Picking up the recent theme of central bank interference by politicians, Rajan makes coherent and persuasive arguments for central bankers to be allowed to do their jobs free of political manipulation. He even has a quick (and perfectly justified) poke at his own erstwhile profession, and the aura central bankers have conjured over what is a very imprecise “science” which at its lowest common denominator descends to the occasional tweak to official policy rates and some public speeches.
Rajan says the central banks’ role is far more than this. And of course, he is right. But whilst all the regulatory oversight and market stability legislation is important, the monetary policy decisions central banks take are their most public, and perhaps widest reaching actions. And let’s face it, there have been some pretty weird decisions in recent years.
Were central bankers to be a little more open about how limited their powers to influence the business cycle, these unwanted political interventions might well be less common. Central banks would then be less likely to end up hostages to populist leaders, and responding to bad policy-making just to preserve growth and inflation targets.
Less is sometimes more
In one important area, Rajan does dip his toes into the pool of self-deprecation – notably central bank communication. The section, “The importance of transparency” might indeed have been renamed, “The importance of opacity”.
On this, former Fed chairman, Alan Greenspan was almost certainly right. More communication is not always beneficial, as it is too often stated and taken for granted. But rather than Rajan’s focus on demystifying monetary policy and the “pointy heads” of Basel, less communication might be beneficial for markets mainly because in recent years, central banks have repeatedly demonstrated that their forward guidance is an inferior steer compared to the combined wisdom of markets. This may owe to little more than the “wisdom of crowds”. But what is clearly needed is not “more communication” but “better” communication. And that may mean “less” when central banks own insight is no better than markets.
In short, one way to get the populist leaders off the backs of central banks would be to adopt a little more humility about their powers of cycle stabilization. In that vein, a little less “guidance” might also result in less distortion in financial and real asset markets than exists today.
ING's Rob Carnell was responding to this article by the economist Raghuram Rajan which appeared on our THINK website on 2 August
Download
Download opinion"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).