The era of the silent, deferential central banker is over

Post-crisis, central bankers like Mark Carney and Raghuram Rajan emerged as financial celebrities. Even Stephen Poloz is loosening up a bit

 
Mark Carney and Stephen Poloz
Former Bank of Canada governor Mark Carney, left, with his successor, current governor Stephen Poloz. (Adrian Wyld/CP)

The world was in love with Mark Carney circa 2012. So I was surprised when an irritated member of the economics academy told me around that time that the Bono of central banking talked too much. Jim Flaherty might have agreed: The late finance minister stopped doing joint press conferences with the governor of the Bank of Canada because Carney got all the questions.

Many—possibly most—students of monetary policy believe central bankers should avoid undue attention. They say celebrity central bankers risk compromising their institutions’ freedom to set interest rates without political interference. As former Bank of England governor Mervyn King once said, “A successful central bank should be boring.”

That’s the old-school view. There is a new school being created by younger, bolder central bankers such as Carney and India’s Raghuram Rajan. The events of 2008 and 2009 changed the role of central bankers in public life. They were made heroes by the financial crisis and the Great Recession, if only because they tried to make a difference while politicians bickered and corporate titans hoarded cash. In an era where objective information is routinely strangled by political partisans and public-relations departments, central bankers stand out for their commitment to research and rational thought. We also see clearly now how much power central bankers wield. Those of us in democracies, therefore, have a right to know what these people think.

Carney, who now leads the Bank of England, has inserted himself into the global debate over what to do about climate change. Rajan has offered constructive criticism of India’s export strategy and entered a sensitive debate about whether the country has become less tolerant of minority views under Prime Minister Narendra Modi. Even Ben Bernanke, the former chairman of the U.S. Federal Reserve, who was no one’s idea of a firebrand, regularly told Republicans in the Congress that their commitment to austerity was hurting the U.S. recovery.

All these figures severely irritated politicians. But they also earned the mainstream public’s respect in the process. Should Carney have stayed quiet about the economic risks of Brexit because it was a touchy political issue? A rearguard action from members of Modi’s party to block Rajan from getting a second term was countered by at least seven online petitions to keep him.

All these figures severely irritated politicians. They were attacked. But they also earned the mainstream public’s respect in the process. Should Carney have stayed quiet about the economic risks of Brexit because it was a touchy political issue? A rearguard action from members of Modi’s party to block Rajan from getting a second term was countered by at least seven online petitions to keep him. Those forms had garnered more than 60,000 signatures by early June. “In the 21st century, good central-bank governors speak out,” said Mihir Sharma, an economist and writer in New Delhi.

Those signatures weren’t enough to save Rajan. He announced on June 18 that he had decided to return to academia when his term ends in September rather than seek an extension. It was clear his decision was something other than voluntary. He stated in a letter to the central bank’s staff that he felt there still was work to do and that he was “open” to staying. However, after consultations with the government and “due reflection,” he decided to leave. Modi did remarkably little to mute the attacks on Rajan, which grew progressively personal. Many lamented the departure; others said he got what he deserved. A central bank governor “is not hired by the government to be a free-wheeling intellectual,” said Vivek Dehejia, an economic professor at Carleton University and a senior fellow in political economy at the IDFC Institute, a think-tank in Mumbai.

Canada’s Stephen Poloz keeps it old school. There is good reason to think the Bank of Canada governor had reservations about former prime minister Stephen Harper’s obsession with balancing the budget. Poloz this year has argued that current conditions—essentially the same conditions that existed a year ago—call for more government spending. On June 4, Poloz delivered a lecture in Ottawa on the proper mix of fiscal and monetary policy. He included original research that suggests a looser fiscal policy after 2010 may have resulted in a lower level of household debt today. Poloz refused to draw conclusions from his research, but I will: Stephen Harper’s choices exacerbated one of the biggest threats facing Canada’s economy.

Poloz’s recent interventions on fiscal policy have been instructive. It is unfortunate he waited so long. He may have respected the rules of the game, but he also denied the political process the chance to correct a bad policy. The Bank of Canada insists it has always accepted there is a role for monetary, fiscal and structural policies in supporting the economy. As evidence, it offers comments Poloz made along those lines in December 2015—after Trudeau won the election. Eight months earlier, when a Conservative member of the House of Commons finance committee asked him to comment on the merits of a balanced budget, Poloz demurred. “It’s really not our role to comment on fiscal policy,” he said.

The governor clearly feels differently now. Hopefully he won’t be dismissed as a public official who says in public only what his political masters are comfortable hearing. That would be unfair. It would also be difficult to refute. Trudeau should make it clear that Poloz is free to test his boundaries. Why? Because it’s 2016.


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