Central Banks Are Now Too Powerful to Have Free Rein ; ECONOMIC ANALYSIS
Lynch, Russell, The Evening Standard (London, England)
HO guards the guards? WIt's a question worth asking as the Bank of England takes on a vast new remit to oversee the financial system alongside its existing rate-setting powers next week.
It was a question also bothering many of the "rock stars" of economics on parade at the London School of Economics this week, including the IMF's chief economist Olivier Blanchard and former US Treasury Secretary Larry Summers. Amid all the valedictory bonhomie for outgoing Governor Sir Mervyn King, some of their comments may have given food for thought to his successor Mark Carney, who took his place in a distinguished audience that might have been a Who's Who of central banking and economics. The Canadian will take up the reins at a beefed-up bank, whose Prudential Regulation Authority will watch over 1700 firms. Soon policymakers will have even more levers to pull. Higher capital buffers will take the punchbowl away when the party is in full swing. So-called sectoral capital requirements will make it dearer for the banks to lend against homes and commercial property if the Bank's new Financial Policy Committee sees fit. The FPC decrees, and the PRA will deal directly with the financial institutions.
The change comes at a time when Threadneedle Street's monetary policy wing is also holding government bonds worth around [pounds]375 billion, a quarter of the nation's output, through quantitative easing. The Funding for Lending scheme is throwing billions in cheap money at the banks to lend on mortgages and (gradually, in theory at least) to businesses, heaping more credit risk on the central bank which has been indemnified by the Treasury for potential losses.
The scope of the Bank of England's operations is now quite breathtaking, if not frightening. For two decades, central bank independence has been axiomatic to monetary policy. Freedom to set interest rates without political interference has been sacrosanct. But we're a world away from the blessed era of the Great Moderation, when the Bank focused on price stability via quarter-point tweaks in interest rates. We are asking so much more of our central banks, particular in the fiscal arena, that we may need something beyond the current system of parliamentary accountability.
As Blanchard put it: "If you think now of central banks as having this much larger set of responsibilities and this much larger set of tools, then the issue of central bank independence becomes much more difficult. …