This blog keeps arguing to move towards a world with less and less of central banking. Central banks evolved in times when banking was not well really understood as a business and may be there was a case for a central bank type of an organisation. Even then the interventions of central banks had more unintended consequences. Federal Reserve was formed to resolve banking panics but played a stellar role in aggravating the same in 1929. Same is the case with central banks worldwide as we are so clearly seeing now.
As a result, one is never sure which battle the central bank should fight and whether the strategy is right. A lot hinges on these decisions given their monopoly over monetary forces. In today’s context, some say central banks should maintain their focus on inflation and inflation targeting is the only game. Whereas others say it is not the right battle and they should switch to financial stability and move away from inflation targeting.
Stephen Roach belongs to the second camp and says they should instead focus on fin stability:
That is hardly a convincing reason for central banks to remain fixated on inflation targeting. Not only have they failed repeatedly to get the inflation forecast right; they now risk fueling renewed financial instability and sparking another crisis. Just as a few of us warned of impending crisis in the 2003-2006 period, some – including the Bank of International Settlements and the IMF– are sounding the alarm today, but to no avail.
To be sure, inflation targeting was once essential to limit runaway price growth. In today’s inflationless world, however, it is counterproductive. Yet the inflation targeters who dominate today’s major central banks insist on fighting yesterday’s war.
In this sense, modern central bankers resemble the British army in the Battle of Singapore in 1942. Convinced that the Japanese would attack from the sea, the British defenses were encased in impenetrable concrete bunkers, with fixed artillery that could fire only to the south. So when the Japanese emerged from the jungle and mangrove swamps of the Malay Peninsula in the north, the British were powerless to stop them. Singapore quickly fell, in what is widely considered Prime Minister Winston Churchill’s most ignominious military defeat.
Central bankers, like the British army in Singapore, are aiming their weapons in the wrong direction. It is time for them to turn their policy arsenal toward today’s enemy: financial instability. On that basis alone, the case for monetary-policy normalization has never been more compelling.
Firstly, it is just wrong to compare central banks to all kinds of things in the world. I mean one can understand central banks making such comparisons but others should desist from making such comparisons. Central banking is hardly anything as dramatic and tragic as warring countries. But it is the financial press and markets which continuously make you feel their power. This is because so much money is at stake and you need to find some entity/person to ride that money on.
Secondly, even this war analogy is just one sided. Victories and losses in wars are largely due to luck and unplanned things. All this strategy business is usually attached later with much of it being forcefully done actually. Same is the case with central banking as well. The heroes of yesteryears become villains of today and vice-versa which itself tells you all there is to so called importance. Wars are also won by a collective action of the several foot soldiers and same applies to the economy as well. It is a pity that all credit for winning (and losing) goes to certain individuals and not the larger section involved.
So, we should actually argue how can we move world of banking/finance to less and less central banking and more and more of market forces. The discussion should not be whether they should target this or that. Whatever the goal is, most likely central banks are going to do make a mess. Let people and markets figure..