Central Banks – the Overmighty Citizens

There is an interesting book review in the FT (occasional paywall) on “Unelected Power -The Quest for Legitimacy in Central Banking and the Regulatory State”, by one, Paul Tucker, previous Deputy Governor of the Bank of England, no less. It comes in at 656 pages so I’m glad the FT has read it so that we don’t have to.

But it acknowledges problems that will be familiar to many of us, direct from the horse’s mouth as it were, well, at least the deputy horse’s mouth. And I sincerely hope it makes it onto Positive Money’s reading list, for Mr Tucker wrote the book wondering ‘to whom are central bankers responsible?’ And ‘How is oversight of their discretionary authority monitored in a democracy?’ I’m fairly sure that his solution is the reason for the length of the book.

The FT summarises:

Far from operating on the fringes of everyday life as disinterested experts, central banks now make decisions that affect every household, in effect choosing winners and losers….Tucker is refreshingly upfront about central bankers’ acquisition of power. He queries “whether and how democratic societies can” cope with the challenges posed by the scale of “unelected power” concentrated in nominally independent central banks. Indeed, such is the scale of monetary intervention that it threatens not only to erode central bank legitimacy but “even that of our democratic system of governance”.

And that is some admission – I do hope Positive Money haven’t got bored before they reach that bit.

I do though, think we should realise that while the Bank of England prevented the UK banking system from collapse it was under the direction of the Chancellor of the Exchequer and Prime Minister. What is clear is that this quick fix in the heat of the moment has since been handed over to the Bank of England to administer. The author worries, as do we all, that the most affluent members of society received most of the help. The rest of us are lucky to earn even as much as we were prior to 2008. Indeed the article quotes an unnamed bank study that suggests that Quantitative Easing is the largest redistribution of wealth across UK households ever, and one which has increased the wealth of the top 10% by £350,000 per household. No wonder Mr Tucker muses on the “legitimacy of delegating power to unelected officials” and whether that can be made democratic.

Mr Tucker considers that Central Bank independence should nonetheless continue as it enables “governments to save paying an inflation risk premium on their debt”. By which I presume he means to indicate that Central Banks are just so jolly clever at controlling inflation. I cannot imagine that he remains of this opinion when recent history suggests that that skill, if the Bank of England has it at all, appears pretty random. And of course many of us would say that a government that issues its own currency never has to be in debt anyway and does so only out of kindness to the City and some pensioners. So the major quoted reason for the independence of the Central Bank proves to be no reason at all.

Still, Paul Tucker’s contention that central banks no longer consist of just neutral technocrats working in the “rarefied zone” of Threadneedle Street but have, instead, become “overmighty citizens” has much merit. Indeed it is the lack of government fiscal activity that has kept them in their overmighty state. Rather less Central Bank independence and rather more government, would, I’m sure, have saved him some of the trouble of writing all of those 656 pages…