Sent: 15-11-2011 11:04:03
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Technocrats Take Over Politics
The distinction between politicians and technocrats has begun to blur. The age of the truly independent central bank may have finished.
Peter Costello often refers to an independent central bank as being one of the achievements of his period in office. Australia was just one of many countries to embrace the idea in the 1990s after controversy about political interference in the setting of interest rates.
There was always a risk in giving central banks independence, as I pointed out in an ATC email just on four years ago in November 2007. The central bankers welcomed the status upgrade but central bank independence created an excuse for politicians. They could neatly sidestep their responsibilities for overall economic policymaking once they relinquished the obligations to conduct monetary policy in favour of the central bankers.
Far from putting them in an economic straight jacket, as some advocates of central bank independence had suggested, central bank independence in Australia and elsewhere might have made politicians even less reliable economic managers.
Heretical as it may sound, we might have been better of without central bank independence.
A culture of leaving it to the central bankers appears to have emerged throughout the advanced economies. As long as the bankers could keep interest rates low, governments could keep expanding the debt or so many governments seemed to infer. Loose fiscal regimes culminating in the debt crises in Europe and the US in recent months testify to this belief.
As the extent of the debt crises has become clearer, central bankers have been called upon for solutions. Bernanke, Trichet and King, for example, were at the forefront in grappling with the north Atlantic financial crisis in 2008. Nominally independent, they were called upon to shore up the short term economic outlook despite the possibly deleterious effects on longer term inflation and overall economic stability of their actions. They became an integral part of the policy response.
The events around the 2008 financial crisis highlighted how governments and central banks could no longer act separately. They had to co-ordinate policy. Increasingly, central bankers were also telling governments how to handle their fiscal responsibilities and setting the terms on which they would manage the economy. In the USA, former New York Federal Reserve chief Timothy Geithner became Treasury secretary.
The blending of politicians and economic technocrats was taken further in the past week in Europe with the appointments of Lucas Papademos and Mario Monti as Prime ministers of Greece and Italy.
Papademos was a former governor of the Bank of Greece and vice president of the European central bank. Monti was a European commissioner. Papademos and Monti both trained as economists with post graduate degrees from MIT and Yale.
At roughly the same time, Mario Draghi, the former Bank of Italy governor and MIT PhD graduate, succeeded Jean Claude Trichet as president of the European central bank and immediately reversed Trichet's opposition to an interest rate cut. Shortly before, Christine Lagarde, the former French finance minister, had assumed control of the International Monetary Fund only to return to Europe to sort out the Fund's most pressing economic problem.
The clear demarcation between politicians and economic technocrats, at the heart of the arguments for independent central banks, is no more. Central banks will still claim their nominal independence but they are responding to the day to day pressures to rebalance the economy in much the same way as the politicians.
None of this is necessarily a bad thing. Ceding one arm of economic policy to people outside government ensured the two arms would be less co-ordinated and was always a dubious advance. There were also anti democratic overtones in elected governments being unable to decide economic policies for themselves. Sure, governments might get it wrong but that is not a shortcoming peculiar to economics. It applies to everything from defence and foreign affairs to garbage collection.
Now the technocrats are in charge (perhaps to the relief of the career politicians). One of the more interesting aspects of the experiment will be whether they come through whole or are diminished by the added responsibilities. Elections in Europe will approve or reject their records.
Perhaps the politicians will come back stronger than ever with mandates to put the technocrats back in their boxes. Perhaps the technocrats will demonstrate their superior capacities. Or, perhaps, the blurring will continue, with the exchange of personnel between parliaments and central banks permanently eliminating any sense that one arm of policy can act independently of another.
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