Adam Smith in his Wealth of Nations tome said this on monopolies (pg 450):
This monopoly has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.
In today’s world, Prof Smith could just be replacing monopoly with central bank and monopolist with central bankers. He would be shocked to see what has been going on in the world of central banking. He could not write on this organisation as it had hardly come into the kind of form we know today. Otherwise he would have warned about it earlier as well.
Democracies and its governments have a new kind of a problem to tackle – central banks and their chiefs. These central bankers are ironically created/appointed by the government but just like a Frankenstein monster, latter have lost control over former. The governments are clueless on handling them. The governments dare enter the territory of central bankers but latter are just free to do whatever in the name of independence.
Given what has been going on in India for a few months (actually for nearly three years now), one needs to find a new phrase. Hopefully all this reached its zenith last Saturday and declines from hereon. But this is just a hope.
The whole thing has become so politicized it is best for the govt to appoint its central bank chief for the same period as the tenure of the government. The government goes and with it goes its appointee. Such has been the demonstration of power of this one position. India will soon need a new head of state- its President. But no one really cares. True the position is ceremonial but still it is head of the country. This is important especially for the tricky political times we are living in.
In economics parlance the threat of all this central banker noise is hardly nominal but real.
One fails to understand what is it that a central banker does which is deemed as important as it is being projected in media. How many people who project these grandiose images even know anything about monetary or financial economics?
It is nothing but a victory for this new form of society and one may call it finocracy for lack of a better word. It comprises the financial sector and the pink media (most of which have barely read anything on economics or finance). The head of this finocracy world is you guessed it – central bank chiefs.
Together, they form opinion on what is wrong and right and create havoc in not just financial markets but in society at large. First the financial markets decide what is right or wrong by merely pressing buy/sell from their laptops/mobiles. They then use their media partners to convey their love or wrath for anything and everything. A monetary policy meeting has become like this meeting of religious fervents who take every word of their head priest (the central bank chief here) and act as per the sermons. The social media will scream post each policy about the importance of the new sermons and next day papers will be fully over it. It is much more than any news. Infact if one one wants to hide a bad news, it should pray that news comes out on monetary policy day as no one will pay any attention.
Earlier central bankers kept to their territory but now it is now fashionable to express opinion on everything in the name of independence and fearlessness. So you have a problem of plenty. Now you are not just expected to guard against opposition but the central banker too. What will he/she say on this matter? Will it be in govt’s favour or opposition’s? Either way central banker wins as if the dictum is in favour for the govt then it will be seen as central bank working with the government. If not, central bank has an independent voice and does not fear to buckle under the government.
This finocracy which arose in the western world but clearly India has upped the game like no other. Now people who say India’s financial markets are underdeveloped should look the other way. What has been going on is not just unprecedented but laughable and irritating at its best.
The whole Indian economy is being seen as this lever which can only be pulled by this one person. No one else is capable for the job despite having a very reasonable track record of selecting these lever pullers in the past as well. Even more is this thing that media and markets may believe this out of ignorance and hype. But it is completely another thing when this one person also thinks so! No one talked about one’s achievements the way they are being mentioned. There has not been one effort to calm the noise and say it is all about the institution and not the person.
All this is coming from a sector which was once despised and abhorred.
All this is coming from a person who belongs to a school which has ridiculed and questioned policymakers of all kinds. How is it that a freshwater school person creates so much noise about being a central banker of all things? But has created such a noise about one’s own policymaking abilities is not even funny anymore.
All this despite all the mess created by central bankers for most part of their glorified history. Best central bankers are actually those who do nothing much.
Even more ridiculous is to see the colleagues from same school backing all this in the name of crony capitalism. But it is the same coterie which backed all this noise all the way. So who is backing whom is not clear. Since when have central bankers/policymakers become so important in the den which thrives on the dictum that markets know it best.
Its own founder once famously said: “money is much too serious a matter to be left to the central bankers.” Even better words were said by Galbraith on men of money. On top of that you have the apt rephrased warning from Adam Smith, the man who started it all.
So much arrogance and hubris all the way is astonishing and deplorable. A lot of this could have been avoided by keeping a low profile and yet doing a decent job as the younger brother has been doing all this while.
Unfortunately, central banking is not meant to be this way anymore. It is more like a movie which is about heroics and entertainment. There will be plenty of finocracy in the hall for company giving a great feeling of well-being. Post the completion of the movie, it is time for a reality check on the real economy. On that there are no answers other than enter another movie hall hoping for more entertainment.
Hope common sense prevails soon but as famously said “it is not common”…