1. Blaming Inflation on Central Banks?

We Enabled
Them: Daniel Moss
A new paper from inside the club says that central bankers became over-confident in their
powers. But the public and politicians need to recognize who conferred them with godlike
standing.  

By Daniel Moss

(Bloomberg Opinion) -- 

The secret is out. Central bankers aren’t deities, as much as we might have sometimes
wished to attribute them with almost supernatural powers. Post-mortems on the surge in
inflation and how it got away will run for years. Let’s not forget to look in the mirror: Did
officials accrue too much influence and was society a willing accomplice, only too eager to
confer that authority?

These are some of the uncomfortable questions that lurk behind a paper co-written by a
former Reserve Bank of New Zealand chief, but its lessons go much wider than a little
country of 5 million people in a corner of the Pacific. Graeme Wheeler, who led the RBNZ
for five years, and Bryce Wilkinson, a former Kiwi Treasury official, argue that central
bankers the world overbecame too confident in their own abilities and, alongside fiscal
agencies, injected way too much money for too long for economies to handle. This problem
was close to universal. Salvation, the authors say, may lie in fessing up and central bankers
going about their business with a new and profound sense of humility.

Critiques of monetary policy are proliferating everywhere. It’s a common feature of Federal
Reserve Chair Jerome Powell's congressional appearances: The Fed waited too long, the
legislators seem to convey, but we’re glad you’re on the case now! Australia has launched
the first external evaluation of its Reserve Bank in at least a generation. Liz Truss, running
for leadership of the UK’s ruling Conservative Party, raised eyebrows when she suggested
that the Bank of England might do well to emulate Japan, notwithstanding its central bank’s
struggle with deflation. What’s striking about Wheeler’s condemnation, published by think
tank The New Zealand Initiative, is that it’s from a member of the club. Central bankers are
generally loath to take on each other in public. It’s also worth listening because the RBNZ
was the first to adopt a formal inflation target thee decades ago, now commonplace.  

To this damning appraisal, I would add a liberal amount of culpability from investors,

politicians and, yes, the financial media who tended to personalize central banks — the
“Greenspan put,” the “Bernanke Fed’’ and so on, and to heap vast praise during good times.
Cults of personality sometimes developed; Fed bosses Paul Volcker and Alan Greenspan,
sure, but Mario Draghi, formerly of the European Central Bank, has also been credited with
a sense of superpower.  
And huge authority has been bestowed on — and amassed by — central banks. In many
ways, this is entirely understandable. As institutions, they can act quickly to stimulate an
economy or rescue a failing bank, unlike the lumbering legislative process and all its
sausage-making. Giving them inflation goals, and the autonomy to pursue them, offered the
best route to long-term price stability. Wheeler and Wilkinson acknowledge the benefits,
but say policy makers became complacent: “They seemed to downplay the role played by
positive supply shocks associated with globalization… They believed that when Covid
restrictions were eased inflation expectations would remain anchored.”  

Fair enough. Having heard naysayers cry “wolf” plenty of times, central bankers can be
forgiven for skepticism that a price spiral lurked around every corner. Greenspan stared
down hawkish colleagues in the 1990s; he thought technological innovation had boosted
productivity enough to negate concerns that a boom would ignite inflation. He was correct.
In the aftermath of the Global Financial Crisis, a group of mostly conservative economists
and investors wrote to the Wall Street Journal predicting that the Fed’s quantitative easing
would lead to a massive outbreak of inflation and debasement of  the dollar. Neither
happened. In 2017, Janet Yellen called MIA inflation a “mystery.” Now Treasury secretary,
she is being forced to defend downplaying the price eruption last year. 

Wheeler and Wilkinson chastise central banks for over-egging the economy during the
pandemic as government budgets were doing the same. However, a big lesson policy
makers took away from the 2007-2009 slump was that they should have responded sooner
and more forcefully. When Covid came along, they weren’t going to be accused
of dawdling. And who was to say that fiscal policy would have enough
impact? Another powerful narrative of the recovery from the subprime bust was that
budget support was withdrawn too quickly, making the rebound slower than it might
otherwise have been. The 2010 US midterm elections ushered in Tea Party
Republicans with an anti-tax, anti-spending agenda. A wave of austerity swept Europe.  

Politicians, who derive their authority from popularity and the ballot box, have been only
too happy to let central banks do the unpopular work. They can act fast, impose pain or
release pressure when needed with alacrity. That spares cabinets and legislators from
getting their hands dirty — and also provides a scapegoat when things go wrong. Spare a
thought for the European Central Bank: It has to work magic in the absence of a common
fiscal policy. Arguably the most celebrated phrase in 21st century economics was Draghi's
“whatever it takes’’ pledge in 2012 during the the euro’s debt crisis. No wonder “Super
Mario” was lauded as Italy’s savior when he became premier a decade later. (His
government collapsed in July amid factional bickering.) 

Central banks are well-crafted for emergencies. “It is tempting for everyone — executive
and legislative branches, commentators and the public — to look upon them as a financial
US Cavalry,’’ Paul Tucker, former deputy governor of the Bank of England, wrote in his
2018 book Unelected Power: the Quest for Legitimacy in Central Banking and the
Regulatory State.

Tucker fretted that authorities could become too dominant. Wheeler and Wilkinson might
agree. For lenders of last resort to do their jobs, they need significant clout and some
perception of invincibility — something too easily conferred. Heaven forbid anyone
challenge them or raise an eyebrow too often. How many times have you heard, or said,
“You’re compromising their independence, recant now!” In attributing blame for today’s
economic travails, we could do worse than look in the mirror. 

More From Bloomberg Opinion:

 Global Central Banking Goes on Trial. In Australia: Daniel Moss

 Where Does Fed’s Jim Bullard Go for His Apology?: Jonathan Levin
 The Fed Still Struggles to Get Its Story Straight: Clive Crook

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Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he

was executive editor of Bloomberg News for economics.

To contact the author of this story:

Daniel Moss at dmoss@bloomberg.net

To contact the editor responsible for this story:

Patrick McDowell at pmcdowell10@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP
and its owners.