At the moment claims that do not bear serious examination routinely pass unchallenged in the circuits of widely publicised speech. The lack of anything like an uninhibited critique of the claims of the powerful in particular creates endless traps for the unwary. This problem is perhaps most glaring in the case of monetary policy. Consider this remark from the resignation speech of a Conservative Chancellor, Norman Lamont, in 1993:
I do not believe that even the timing of interest rate changes should ever be affected by political considerations. Interest rate changes should never be used to offset some unfavourable political event … The time has come to make the Bank of England independent.
A few years later, according to Geoffrey Robinson, the future Labour Chancellor Gordon Brown was “struck by how American interest-rate movements were not a political issue”. In a meeting with Brown, Greenspan had, again according to Robinson, told Brown that it was “‘unfair’ to expect politicians to take unpopular decisions on interest rates”.
We are so used to hearing that central banking is best left in the hands of experts and away from political interference, that we can, if aren’t careful, miss the glaringly obvious. An intimidating complexity surrounds an atomically simple truth. Central banking is unavoidably political, no matter how much bankers and elected politicians tell us, and themselves, that it isn’t.
The decision to raise the cost or lower the costs of money always has important distributional effects. Some win and some lose from a central bank’s mandate, no matter what it is. And the interpretation of that mandate creates opportunities for decisive intervention in the economy and in society at large.
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When the financial sector looked set to collapse under the weight of more than a decade of speculative innovation, central banks around the world began cutting interest rates rapidly. In Britain, Bank of England brought them down from 5 per cent in September 2008 to 0.5 per cent in March 2009. They have remained there ever since.
In the United States, rates fell from 5.25 per cent in August 2007 to a round 0.00 per cent in December 2008. The Federal Reserve has kept the rates at 0.25 per cent for the best part of four years. And the central banks have done even more to help the financial sector than that.
Through programmes of quantitative easing they have bought government debt via financial sector intermediaries – an attempt to give an air of propriety to frenzied money creation. This concern to keep up appearances generates gigantic fees for their struggling counterparts in the private sector.
But more importantly, the banking system has been put on life support after its high-speed collision with economic reality. The decision to save the banking system from its own recklessness can only ever be understood if we see it for what it was, a supremely political decision.
Banks create money in the form of debt. They play a crucial role in determining how demand is distributed in the economy. Hence they determine how the economy develops and who gets what. This is an extraordinary power and, again, it is fundamentally political in nature. Those who wonder why the world is largely owned and run by clever, selfish, middle-aged men should start their inquiries here.
From time to time we hear politicians or commentators who object to this arrangement. But the voices that become audible in the public sphere tend to come from the libertarian right. Followers of Friedrich Hayek call for the abolition of central banks and the establishment of a free market in money. The Republican Congressman Ron Paul in the United States and the Conservative MP Douglas Carswell in the United Kingdom forthrightly argue for this approach.
Certainly, a debate on monetary policy in broad terms would be welcome. Indeed, the absence of one is an important indication that there is something profoundly wrong with the structures of public speech. But it is not at all clear that privatising the money supply outright is the royal road to economic stability and general prosperity.
“Banks create money in the form of debt… determine how the economy develops and who gets what.”
There is no reason to think that bankers would stop behaving recklessly, just because they lost their implicit public guarantee. The ability to create money is a high few can resist. Smartly dressed and responsible they may seem, half of all bankers are half mad with the thrill that money brings. And you can take those figures to the bank.
But what should be done? Let’s start with something uncontroversial from a renowned authority on economics and pillar of the establishment. Martin Wolf is the associate editor of the Financial Times and a former member of the UK government’s Independent Commission on Banking.
In a book published before the financial crisis he argued that “the management of any systematically important bank that has to be rescued by the state should be disbarred, as a matter of course, from further work in the financial industry”. He goes on to say:
Remember the fundamental point. Big banks have consistently operated in the knowledge that their profits are private and losses, if large enough, public. In other words, the institutions they run are underpinned by the state. Managers are, in an important sense, public servants. If they abuse that trust, they should be treated accordingly.
Wolf is quite right about this. And it follows that we must now relieve the entire management of the financial sector of their onerous responsibilities for creating credit and directing investment. They obviously can’t help but act recklessly and we are being, to borrow a word from Alan Greenspan, “unfair” if we expect them change. The condominium of central bankers and the financial sector has failed. It can survive only at an unacceptable cost.
One question remains. If bankers can’t be left to create money, then who should? The answer won’t surprise regular readers of this column. The only sure guardians of the public faith and credit are, of course, the public. If we are on the hook for the money that’s created anyway, then we need to make sure it’s lent into existence in the service of ends to which we give our open-eyed support, for which we are willing to work.
Dan Hind is the author of two books, The Threat to Reason and The Return of the Public. His pamphlet, Common Sense: Occupation, Assembly, and the Future of Liberty, was published as an e-book in March. He is a member of the Tax Justice Network.