Central banks’ power

The grey man’s burden


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Oh, if only that were actually true. Unfortunately, it is not—even when interpreting the idea from several different perspectives. First, the central banks have been the most important enforcers of monetary policy ever since the gold standard was abandoned during the Great Depression and since the current fiat monetary system was established separately from it. This means that central banks had (and still do have) central control over the fiat money supply unlike gold (which is a finite commodity, becoming ever increasingly difficult to source, and not promoted by central bankers precisely because it is outside of their control).
Fiat money can be created almost exponentially (NB: I say “almost” here—because eventually even that will have run its course in terms of both its purchasing value and/or the physical resources available to actually produce it (even if the last remaining 5% of physical global currency were digitized). In that sense, it is not governments that direct central banks, but rather the central banks that have been directing governments for a very long time. Consider this: who does the government turn to when it requires a greater supply of money to be circulated in a nation’s economy? It may tax its citizens more heavily or encourage greater borrowing, spending, or purchasing with attractive interest rates set in collusion with the central bank, and so on; however, as is widely known, the current debt to GDP makes it impossible under the current system for all the country’s citizens to ultimately offset the ever-increasing national debt to GDP and the inevitable economic slows that ensue. Instead, what do governments do? They ask the central banks to conduct “quantitative easing” in order to provide them with a greater supply of money to distribute to corporations or to “bail out” ‘too big to fail’ institutions (which, frankly, should be left to FAIL), etc. This increases the monetary supply to temporarily “stimulate” the economy; however, it debases the fiat currency and decreases its purchasing power in the long-term due to consequent inflation. Furthermore, this course of action actually puts off dealing with the ever-increasing rate of national debt per GDP by creating temporary cyclical economic “bubbles” to give the misperception that the economy is “actually improving in the long-run”, which it most certainly isn’t.

If we really want to address current economic issues, we actually need to rethink the whole structure of our monetary system. A good place to start would be to do away with the totalitarian hold of central banks over their (supposed) nations’ citizens and discard both “puppet” governments and a vast majority of politicians who merely dance to the tune of the central banks to the detriment of the masses. Instead, we should return control of the monetary system and supply to the true drivers of the economy—the nation’s people.

Adam Papa

In today’s interconnected world of business there is a large emphasis on central bank policy. These policy makers seem to have the world’s markets around their fingers. If the Federal Reserve says they will be implementing more quantitative easing the markets tend to rise. This makes the policy makers out to be rock stars, however as described in the article this wasn’t only the case. As of now politics is playing a more and more important role in influencing central bankers. However most of these politicians aren’t educated in economic theory and finance, and have very little experience in this field. Before the financial crisis the central bank policy makers were widely unknown by the general public, but today you can’t mention Ben Bernanke without at least the majority of the people knowing who he is. These policy makers have the most influence on financial markets and the world economy that I have ever seen. The markets move with every Fed announcement. In my opinion what makes central banks so great is there level of independence from politics. Politicians in my opinion are worried about their public appearance and approval ratings, but more importantly they are concerned with re-election. Central bankers are more long term orientated and don’t run for their positions. When the independence of the central bank is threatened, the probability for detrimental effects on the economy increases. With the central bank holding so much power it is a necessity to keep the politicians out of the Central Bank’s business. It is important for the Fed to become more transparent and explain to the people what the goals of each action are. The Fed needs to explain that when they buy these government bonds that they are trying to keep the interest rate low so it can induce companies to borrow money at a very cheap rate. In conclusion the Fed and other Central Banks must keep their independence from government in order to be the most effective.


The European Commission and ECB participate in mind control of important politicians. It is done with implants and wireless network (they call it "Converging Technologies"). It is really disgrace and shame for the Commission, because they cooperate with criminals such as Soros or Mobile operators as Telecom Austria with drugs involved in their Bulgarian Telecom (owned previously by the convicted in money-washing Chorney see him in Interpol)
I found that I have an implant for mind control in Budapest CEU. I worked for Ministry of Finance in Bulgaria and the Bulgarian Central Bank. I measure the waves on Telecom Austria wavelength. It also works on a airplane. Many top politicians, businesspeople are mind controlled incl financial Ministers of Hungary, Poland.
The most interesting is the reply of the European Commission to my complaint. They say "it is an internal to Bulgaria problem" and I clearly state it works with me even in the building of the European Commission and there are Commissioners with mind control on the same network. It is a shame European Institutions to be involved with criminals and crimes. Just measure the wave-lengths of politicians or use FRMI. Tomorrow everything will be clear, even who organized the crisis and who benefits from it. What about our "common future"?
Involved in Bulgaria are : Statti Stattev, Kalin Hristov, Mariela Nenova, Rosen Rozenov, Andrej Vassilev, Grigor Stoevsky, Kristina Karagyozova, Cvetan Calinski ... They lost 20 bln on Stock Exchanfe, 10 bln bad loans, tens of bln on housing market


One leaves people in and with power alone at ones peril. Certainly people with absolute power should be controlled. Central bankers, bankers in general and rating agencies got the world economy into a terrible mess.

Politicians were left to bail them out with tax payers' money and loans. And now The Economist has the temerity to headline this article with the message to leave them alone. What are they thinking?


The central banks did not save anything.
Instead together with the politicians they have been causing immeasurable harm by taping over the cracks, giving pain relief to a terminally ill patient.
The only thing "liquidity injections, stimulus packages" are doing is delaying the inevitable. Actual growth, actual meaningful progress has stopped long time ago, all the necessary factors driving a constant quantitative growth economic model have been exhausted. What keeps numbers at acceptable level today is either previous momentum in the developing part of the world, or cosmetic surgery creating more and bigger bubbles.
If instead of trying to pretend everything is all right, and we can still recover, and return to growth people looked straight into the mirror and accepted that we have to change ourselves and the system, we could already be progressing on a different path towards a more predictable and sustainable future.
Instead we keep pretending, wasting all remaining resources on futile institutions, "solutions" until we fall into such a deep hole that any recovery, rebuilding will be extremely difficult and unpredictable.

think_laterally in reply to ZGHerm


Thank you for such a poignant comment.

Jukka Kautto

What central bankers really did, was ultimately switching off the most important market signal, the price of capital by unwarranted digital liquidity. Were this simplistic solution so successful, why not to have it extended to private uses too and let pc printers do their job and wipe out all private debts as well? The only real difference between these two QEs is the central bank action´s not labeling to counterfeiting as widely. The world already witnessed twenty years ago an empire´s fall caused by the lack of market signals, but this time following the same path in global scale, the results would be different even, when expected growth figures now only keep on accumulating in debit columns.


"By providing massive liquidity to the financial system, they saved the world from economic collapse in 2008"

Saved the financial system, yes. But you cannot simply state that economic collapse was inevitable had the liquidity not been provided. This is theory, perhaps the best theory ever, but still just theory.

This is the point we are at. Such honor is bestowed upon Central Bankers that we cannot even question the "success" of their interventions into the free market.

I think the “success” of central bankers’ market intervention has been, and still is, a deferral of actually dealing with the root cause of economic debt and instability by providing non-durable “quick fix” quantitative easing and a whole range of taxes all dressed up in various guises to increase liquidity and put off the otherwise inevitable financial crisis (if the same course of action is continuously pursued) to a later date.

Patently Oblivious

Better yet, send central bankers into retirement by going onto the gold standard.


Central bankers are presently tasked with the impossible - covering up for corrupt and incompetent politicians, and structural deficiencies of their economies. Overweight government and its useless leeches sap resources and distort the economy. Central bankers are explicitly or implicitly tasked with maintaining price and financial stability, and they do this by flooding the world with cash (along with measures that temporarily mop up excess liquidity, so the skyocketing inflation is yet to come), thereby making sure that nothing changes and bad habits are conserved.


In % terms this thread has more (silly) 'wall of text' posts than any other I can recall - so why not add one more? -

"... There were a few stars (such as Alan Greenspan) and a few controversies (whether to prick asset bubbles). " (Great Leaders)

Umm ... and no controversy at all about the wisdom of creating those asset bubbles that burst (and barfed) all over all of us. Everyone in authority loved the '.dom' bubble and the housing boom, and sub-prime loans demonstrated what properly-PC caring people we are by enabling folks who had no business owning a house to get so f**kin'-far-in over their heads that ... - if only those bubbles were made of unbreakable cast-iron; if only ....

"By providing massive liquidity to the financial system, they saved the world from economic collapse in 2008." (Dear Leaders)

On another thread it was observed that the criminal organization that is the Red government of Han-land, cranks-up the rhetoric of its drone NK whenever it wants to remind the world that Han-ass must be kissed to keep NK from going totally ape-****. CB-sters have embraced this ploy - create bubbles via QE and then proclaiming their indispensable virtue as our saviors when those bubbles burst and wreck destruction far-and-wide. How many times you gonna fall for this scam, Exalted Leaders?

"The squalls will get worse when central bankers start selling the bonds on their balance-sheets or tightening lending rules to prevent a new housing bubble." (W(ho)TF are these Leaders?)

No CB has even considered any such thing since Volcker's 'October Decision', back in '79. Allowing/promoting new bubbles is so much easier than preventing their formation, and it earns the guilty CBer the title 'Maestro' (until it all falls apart - once again). You Leader-types really think it's gonna be different this go-round?

"Societies give unelected technocrats power over monetary policy because they think they will do a better job than politicians with an eye on the next election." (Boys in 'Leader-hosen')

No, that is the public rationalization given for the current format - nobody 'in power' believes it works this way. Quite the contrary - CB bosses are the most reliable, pliable political brown-nosers on God's Green Earth. Only when CBers get up off their knees do their pols, as in Japan now (or in the US during Volcker’s early years), make any fuss.

"Price stability is now widely considered insufficient to ensure overall economic stability." (Guys who wish they were 'Leaders')

Bullshit. That nonsense is "widely considered" only by those whose bad advice has brought us the misery we now enjoy - and their apologists of course, like our own RA and Sanjait.

"Setting the central banks’ goals is the politicians’ job." (Them)

This - ^ ^ - may well be the only bit of unadulterated truth in the entire piece. IMO the tighter and more modest the goals are set the better the long-term outcome will be. CBs don't create wealth - people do. F**kin' around with money supply or anything else has proven to be beyond the capability of any CB in history to manage without causing disaster. Past time to take their toys away from them, and send the academics who have destroyed out finances back to their Ivy League sinecures - with the warning that they (and all their lineal family members) will be shot if they ever again stick the hooked-beaks into public policy decision-making.

Long/short/medium-term, the supply of money should rise in line with the potential output of the economy. A single mandate to attain that will make bubbles of the lethal variety we have recently experienced practically impossible; any that do form will burst without taking the rest of society over the edge with them. The ‘Tulip Bubble’ didn’t cause a ‘systemic crisis’, did it?


where is the line that politicians should set clearer goals to central banks and leave them alone? I think what they need is concrete suggestions to this complex relationship between the both.


Why so few responses to a hugely important subject? One might suspect that “we don’t know where to begin.” More the reason to thank The Economist for raising a complex subject that impacts all the seven continents.

This reader would modestly expand upon your assessment and recommendations. Confining observations here to The Board of Governors of the Federal Reserve System, commercial bank supervision – lost in all the recent discussions and analyses - must be elevated to equal stature among our central bank’s responsibilities. Sheila Bair, while leading the Federal Deposit Insurance Corporation, publicly identified the too rapid growth in mortgage debt as cause for concern. What did the collective heads of state at the Federal Reserve miss and why?

Simply put, asset growth cannot outstrip the income supporting it for any extended period of time, for if so freely underwritten, such trends will define the crisis soon to arrive. Consider the 1920s. Or consider the commercial real estate bubble in the 1970s, side-by-side with the "growth stock" bubble. And the junk bond and thrift crises of the 1980s, hyphenated by the 1987 stock market crash, not to mention the open commercial bank vaults afforded the Emerging Markets, then known as “Less Developed Countries”. The extreme over-capitalization of the dot.com’s followed in the 1990s. And Fannie and Freddie recklessly operated without audited financial statements in the 2000s. Is it that they knew they were not “going concerns” before the fact? Near the top of the list, however, must rank the global explosion in the underwriting of mortgage debt by out-sized financial institutions – firms born of the mergers between investment and commercial banks in the United States - that led to the most expensive financial bust in world history.

Simple observation should have raised concerns enough in each of these cycles to sound alarms, pointing to the need to closely review the banking industry’s role in each: In what were the banks involved? Where were they involved? How and how much? Where were the risks? What were the risks? Who was at risk? If nothing else, timely “jawboning” – once the central banker’s often used tool - would have put bankers and all investors alike on notice: BEWARE.

Jawboning is an art form, but one grounded firmly in simple arithmetic. In turn and most potent would be the follow-through with institutions identified as potential “problem banks,” where issues were unearthed in the normal course of on-site supervision. (Note: Cycles cycle. We should not expect cycles to be eliminated. The cycle is the phenomenon that exposes the strong and otherwise invisible hand at its best. Attempts to over-compensate for cycles will likely to continue to be followed by ever larger downswings, set up by the very efforts to avoid them.)

But what are we to do with the “Too Big to Fail” - the ones that have already failed us at huge costs in one way or another? One answer: undo the mergers of the conflicted bankers. A commercial banker is allowed to keep his or her job when loans are repaid, while an investment banker is compensated handsomely solely for pushing money out the door – other people’s money. Their frames of reference are at opposite ends. The former assumes material risk for misguiding depositors’ funds; the latter does not. The former’s asset turnover is the lowest of any economic sector. Further, it is capital intensive and leveraged. The latter’s turnover is high, made higher still by deals presold. Moral hazard in extremis.
We must come to grips with the conflicting motives and compensation schemes substantially levered to both sides of big banks’ balance sheets. In theory, this would be simple. In practice, not so as politicians, politics, and revolving doors divert the motivation, energy, resources, and time to do so. There are solutions, but they are another matter, one that should be – and could be - addressed if we desire a robust, healthy private sector that is self-sustaining.

Commercial banking is central to all developed economies. Therefore, central banking deserves protection and independence from political forces. To these ends, it should attract the best and most practiced in the real world. Just as smart fiscal policy supports counter-cyclical budgets, so does monetary policy require the barkeeper to empty the punchbowl just when the party’s getting good.


Tom Ripley

How do we know that central banking is better than a money supply created by private banks? Univ. of GA professor George Selgin has just written an excellent post on this at freebanking.org (Dec. 3, "Fedophilia").

Why do all Int'l Trade textbooks assume that free trade is best, yet all macro and monetary econ books take the existence of a govt monopoly on money creation as a given?

Surely, before we can assume that a central bank is necessary, we must first demonstrate why the free market alternative is unworkable, no? If not, please explain how we can know a priori that central banking is better.

Austrian Smith

The goal is simply to prevent inflation. The problem is the economics employed denies the quantity of money can effect asset prices and for far too long bankers have allowed monetary growth to exceed economic growth, which means we have debt unsupported by economic growth.

The world will now pay for this basic failure with a depression the like of which we have never experienced.

M. Jha

When narrow political considerations ride higher than the time tested economic principles, the real problems start. An independent Central bank is a must for economic stability.


To the Economist,

As you are aware, central bank independency in it of itself is not an objective for an economy. In general, the role of a central bank is to contribute to sustainable economic growth through maintaining stable prices and currency, and secure the stability and viability of the financial system in the economy. Independency is one of useful means to aim at and best achieve the above ultimate objectives of an economy. The central banking independency is not the one of the final objectives for a society.

Abe is right in advocating for increased collaboration between the BOJ and the government in boosting economic growth in Japan. The issue in Japan is that the BOJ currently enjoys too much independency and that the scale of monetary policy thus far has been too small or too slow in addressing the deflation and stagnation of the economy. The BOJ has to be accountable.

As you know, the BOJ has been extremely bureaucratic, has been too closely following the precedents , and has not done enough to arrest the deflation. The BOJ, however, has not been penalized at all, but has been overprotected due to its independency.

I do not believe that Japan will be able to fully recover with only monetary policy to be conducted by the BOJ. Fiscal policy has to become more expansionary to stimulate aggregate demand. After all, we are all in a liquidity trap with zero policy interest rate, where monetary policy is less effective, while the fiscal multipler can be very large.

On the fiscal front, I suggest that both permanent and tax cuts should be implemented on corporate and individual taxes rather than public works, which are more likely to be wasted.

In addition, nominal GDP targeting policy, which requires intricate collaboration between the BOJ and the government is preferred to the inflation targeting policy, which tends to put less emphasis on the responsibility of the government for combating deflation and stagnation.

In this context, central bank independancy may not a solution, but it could be a problem. More collaboration between monetary and fiscal policies will be necessary to best achieve sustainable growth in Japan and elsewhere in the future.

Tomo Nakamaru
Chief economist and President
Macro Investment Research Inc.


"[T]hey saved the world from economic collapse in 2008." My, such a grand-sounding accolade! Truly gods these must be!
Saved the world? Please. Central bankers did nothing of the kind. In the U.S., the Federal Reserve, panicking amateurishly, merely substituted a much greater and more destructive future collapse of the dollar, and perhaps the Republic, in order to prevent their favored industry colleagues from what would have been a few healthful and long-needed bank failures that could have by now cleansed the toxic mortgage waste out of the system and restored sanity. Now the central-bank balance sheet consists largely of mounds of garbage; banks, rather than intermediating and allocating credit are hoarding reserves to earn a tiny but guaranteed return from the Fed; and the only thing that makes the dollar look any good is the even-lousier and even more-debased currencies of other basket-case countries. Yeah, three cheers for these heroes.
Their only success is masking the real underlying problems; tricking people into maintaining unjustified spending levels (GDP is everything, right? Balance sheets be damned!); propping up prices to maintain the bubble, the illusion; choking banks and creating jobs for themselves with insane new regulations; and blaming others when it was their bubble-blowing (combined with insane GSE mortgage programs) that caused the mortgage crisis in the first place.
I wonder how much praise TE will heap upon central bankers when they try to undo the mess they have made. Oh, wait: That's right. Central banks never do that. They just keep buying and printing happily away, bolstered by sycophantic praise from writers who, it seems, have little idea what money is and what monetary policy is supposed to be doing. (The irony of The Economist having a column by "Bagehot," who in real life actually did know, is not lost on we readers).
Another point: The political backlash from the politicians is hardly the story. Worry about the citizens. On the ground level (far beyond editors' field of vision), the people, especially young people, are questioning the functions, the intentions, and the legitimacy of central banks like never before. The more they are learning about the Fed, the less they find they like and the more they consider and adopt alternative monetary arrangements to pursue their safety and happiness.

Omricon in reply to berferd

The article is entirely legitimate. The process you advocate would also have resulted in a great depression to mirror the one from the 30's. Fiscal and monetary policy has to look forward, not back to eras which were less flexible and less sound.



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