Constitutionalist central banking in a world of inert politics..

Paul Tucker, author of “Unelected Power” writes in IMF’s F&D Magazine:

Let’s briefly take a step back to the world of 2018–19. Politicians were attacking central bank monetary policy and bank supervision across the world: from the US, via Italy and Turkey, to India. Powerful private sector actors wanted central banks to buy equities from them whenever the next recession arrived. And technocrats themselves were embracing think tank calls to steer the supply of credit to tackle climate change, inequality, productivity growth and other pressing social problems, even while some were hauled up for intervening in politics and so departing from their mission.

Around the world, the political left was calling for “People’s Quantitative Easing”; libertarians sought salvation in privately issued cryptocurrencies; and the conspiratorialist fringe persisted in seeing monetary officials as in league with enemies of the people.

Whether you cheer or choke on that, it was obvious, even before COVID-19, that something was going on in the once-sober world of central banking. Being the only game in town was turning out to be a political, even constitutional, nightmare.

And then came COVID-19, returning central banking to the kind of role it played when, from the 1930s to the 1980s, it was merely an instrument for finance ministries. In some jurisdictions (notably the US and euro area), the central bank has in effect been standing in for governments which cannot act decisively or promptly, risking becoming the de facto fiscal authority. In others (perhaps the UK), the central bank will finance executive government, possibly without a framework that ensures an exit route, and risking releasing executive government from the constraints of the elected assembly.

He says there are 2 models of central banking. Central banks as provider of club goods or central banks as provider of common and public goods.

Those latest developments remind us that two quite different models of central banking prevailed in the past. One sees a country’s central bank as the operational arm of government financial policy, its functions determined by technocratic comparative advantage. This model is rooted in central banks being the pivot of the payment system, as Francis Baring observed toward the end of the 18th century. As the banking community’s team captain, they provide, in economic terms, club goods.

Under the other model, central banks are independent authorities delegated specific responsibilities and formally insulated from day-to-day politics. They provide public goods (such as price stability) and preserve common goods (such as financial stability) that can be enjoyed by all but eroded by the exploitative.

Those modes of existence are so distinct that passage from one to the other is often fraught. In emerging market economies, even after formal independence central banks are sometimes expected (and occasionally want) to continue to provide a very wide range of services to their society. In advanced economies, the transition from subordinate agent to independent trustee has typically raised questions about boundaries, sometimes at the cost of welfare.

For example, as the Bank of England sought during the late 1980s and early 1990s to make itself tolerably fit for monetary independence, it voluntarily dropped its involvement in industrial finance, corporate governance, some noncore banking services, and all securities settlement services. And yet, in 1997, when independence finally arrived, banking supervision was still transferred elsewhere, with fairly catastrophic effects in the years leading up to and through the 2007–08 crisis. This episode has lessons for all as it reflected underlying tensions in the division of power between monetary authorities and treasuries.

Constitutional central banking means relying on principles:

We need some principles: political principles. Anyone committed to the separation of powers that lies at the heart of constitutional government should want central bank independence to be preserved. Otherwise, presidents and prime ministers could use the printing press to fund their pet projects and enrich supporters without having to go to the representative assembly for legislated approval. Aspirant authoritarians, on the left or right, will be alert to the attractions of seizing or suborning the monetary power; the IMF should catalogue past examples.

But while an arm’s length monetary authority, insulated from day-to-day politics, can help underpin a constitutional system of government, unelected central bankers surely need to be constrained by legislation. Legitimacy depends on it, which matters greatly because that is what holds things together when, occasionally but inevitably, public policy fails the people.

To be accepted as legitimate, a government institution’s design and operation must comport with a political society’s deepest political values. For constitutional democracies, these include the values of democracy, of constitutionalism itself, and of the rule of law. Central banking cannot be excluded.

My book Unelected Power sets out principles of delegation for independent agencies. These include, to mention just a few, being set an objective that can be monitored; not making big distributional choices; one-person, one-vote committee decision-making; published operating principles for the exercise of delegated discretion; transparency, and public comprehensibility; any suspension of independence being formal; and a lot more.


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