Adam Smith in his ‘Wealth of Nations’ said this on monopolies (Page 450):
“This monopoly has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance.
If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.”
In today’s world, Prof. Smith could just be replacing monopoly with central banks and monopolist with central bankers. He would be shocked to see what has been going on in the world of central banking. He could not write on this organisation as it had hardly come into the kind of form we know today. Otherwise he would have warned about it much earlier.
Democracies and their governments have a new kind of a problem to tackle – central banks and their chiefs. These central bankers are ironically created/appointed by the government but just like a Frankenstein monster, latter have lost control over former. The governments are clueless on handling them. The governments dare enter the territory of central bankers but latter are just free to do whatever in the name of independence.
The whole thing has become so politicized that it is best for the government to appoint its central bank chief for the same period as the tenure of the government. The government goes and with it goes its appointee. Such has been the demonstration of power of this one position.
In economics parlance the threat of all the noise made by central bankers is hardly nominal but real. One fails to understand what is it that a central banker does which is deemed as important as it is being projected in media. How many people who project these grandiose images even know anything about monetary or financial economics?
It is nothing but a victory for this new form of society and one may call it finocracy for lack of a better word. It comprises the financial sector and financial media. The head of this finocracy world is, yes you guessed it – central bank chiefs.
Together, they form opinion on what is wrong and right and create havoc not in just financial markets but in society at large. First the financial markets decide what is right or wrong by merely pressing buy/sell from their laptops/mobiles. They then use their media partners to convey their love or wrath for anything and everything. A monetary policy meeting has become like meeting of a religious fanatics who take every word of their head priest (the central bank chief here) and act as per the sermons. The social media will scream about the importance of the new sermons and next day papers will be full of them. It is much more than any other news. In fact, if one wants to hide a bad news, he or she should pray that the news comes out on monetary policy day as no one will pay any attention.Earlier central bankers kept to their territory but now it is fashionable to express opinion on everything in the name of independence and fearlessness. So you have a plenty of problems. Now you are not just expected to guard against opposition but the central banker too. What will he/she say on this matter? Will it be in govt’s favour or opposition’s? Either way central banker wins as if the dictum is in favour for the government then it will be seen as central bank working with the government. If not, central bank has an independent voice and does not fear to buckle under the government.
All this, despite all the mess created by central bankers for most part of their glorified history. Best central bankers are actually those who do nothing much. Since when have central bankers/policymakers become so important in the den which thrives on the dictum that markets know it best?
Milton Friedman once famously said: “money is much too serious a matter to be left to the central bankers.” Even better words were said by Galbraith on men of money. On top of that you have the apt rephrased warning from Adam Smith, the man who started it all.
So much arrogance and hubris all the way is astonishing and deplorable. A lot of this could have been avoided by keeping a low profile and yet doing a decent job.
Unfortunately, central banking is not meant to be this way anymore. It is more like a movie which is about heroics and entertainment. There will be plenty of finocracy in the hall for company giving a great feeling of well-being. Post the completion of the movie, it is time for a reality check on the real economy. On that there are no answers other than enter another movie hall hoping for more entertainment.
Hope common sense prevails soon but as famously said “it is not so common.”
(Amol Agarwal is an Indian blogger and can be read on mostlyeconomics.