Once upon a time, banking at large and central banking in particular were extremely boring crafts. Bankers fled from the bright lights ofthe public frenzy like birds fly away at the sound of a shot. Riskaversion paired with the urge of secrecy, decency and silence. Thiswas even truer for central bankers: They did not want to be heard orseen, only occasionally felt as they intervened against the potentialenemies of the solidity of their respective currencies. Those times are no more.
Banking became the Hollywood of the economy. The freakier the behavior of its agents, the moreattention they get. The riskier their investments are, the higher their bonuses (but the lower thereturn for customers and investors). The more their status ascends to other-worldliness, the morethey lose touch with reality – and with their own mandate.
Like some Hollywood actors, bankers also entered politics. Indeed, acting politically became thespecial hobby of central bankers. Instead of sticking to the independency of central banking, amuch cherished principle in all (imperfectly) market-oriented economies, central bankers decided to redefine the semantics of that term. Fundamentally, independency means absolute separation of central banking and politics. Thisabsolute sense is two-fold: It requires politics to leave central banking to its own realm but it also stipulated that it has to act completely disclosed from politics. Ideally, central-banking would only be committed to a functioning monetary system and a solid currency. Its agents were not supposed to anticipate, complement, accompany, be in touch with politics or specific policies, and maybe not even know what politics are. Central banking was supposed to be committed to the technicalities of money.
Nowadays, central bankers all around decided to sacrifice independency in order to become superheroes in politics. They want to save the world. Instead, they become low ranking, mindless slaves to whichever more or less twisted aims of national politics. And they might end in endangering the global economy. Some examples should make this clear:
In Japan, its central bank was willingly manipulated into that little scheme called “Abenomics.” It increased the monetary supply without need, lowering thus the value of the yen. Consequences:
The prices of imported goods rose, the purchasing power of the people sank and therefore, Japan’s economy continues moored. But the population gets poorer. In Switzerland, its central bank anticipated politics and pegged the Swiss Franc to the Euro for three years. Why? Nobody knows. Swiss central bankers mumbled at the beginning something about deflation risk; they silenced about it over time. This extremely expensive policy could not be continued and so it was stopped. Consequences: Huge imbalances in the money markets, companies had incentives to discontinue their increase in productivity, and now, negative interest
In the Eurozone a massive quantitative easing was induced just recently. In reality, it is just a masquerade for fiscal policy, i.e. subsidies. Most EU countries are broke and will continue to be broke after whatever sorcery EU politicians expect. The money-injection will be used lavishly and the main problem of the European countries will not be addressed: their enormous amount s of public debt and their structural difficulties. Consequences: Further loss of productivity, inflation and asset prices bubbles are likely. Like the ones induced by the same type of policy by the U.S.
What is there to do, then? The answer is simple: nothing. Bankers, especially central bankers, have it in their mandates to be boring. Being independent also means acting independently. Central banks should be committed only to price stability and the solidity of the monetary system. Bankers generally, but especially central bankers, need to be freed from the shackles of politics and from the vice of public flashlights. They are supposed to be boring. And boring they shall be ― for the greater good.
Henrique Schneider is the Chief Economist of the Swiss Federation of Small and Medium Enterprises.