Mon. Dec 6th, 2021


The author is author of ‘Unelected Power’ and a former central banker. His new book on geopolitics and the international economic system will be published next year

The seemingly endless rush for the reappointment of the chairman of the Federal Reserve – the will he, he will not or President Joe Biden will bow to progressives, stay at the center, listen to Wall Street, main street or powerful senators – was Monday finally resolved. Jay Powell is, after all, still four years in the post.

The dance revealed flaws in the design of the world’s most important central bench to be remembered after the excitement is over. Fortunately, these shortcomings can be corrected fairly simply.

No elected politician lightly misses the opportunity for drama in the exercise of patronage. In Britain, I had a seat for the events surrounding the reappointment of successive Bank of England governors in the days when they served short, renewable terms. In either case, politicians would loudly let it be known that they were considering alternatives. And in each case, they have seized it, despite obstacles we can scarcely imagine. ”

In that case, from Gordon Richardson in 1978 – that is, Robin Leigh-Pemberton, Eddie George and Mervyn King – each was re-appointed for another five years. Given the cost to all concerned, especially the public, when legislative reform was prepared after the 2007-’08 financial crisis, the Bank proposed a move to a single non-renewable term of eight years. It was already the regime for the European Central Bank, and the US Congress should introduce it for the Fed when it gets the chance.

It’s not just about avoiding unnecessary uncertainty about future monetary policy, or the distracting effort spent on campaigns to survive or succeed. The fate of Alan Greenspan’s five four-year terms, spanning 19 years at the helm of the Fed, warns us of deeper dangers.

If the central bank’s independence justifies offering a counterweight to political short-termism, it was more than ironic that as Greenspan’s stature grew, U.S. presidents found themselves trapped as the expiration of his most recent term approached. In the words of his biographer, Sebastian Mallaby, “the longer he stayed, the more reassuring his presence was”.

Fearing an attack of market instability as any new broom was established, successive presidents were prevented from doing the right thing for the long-term health of the institution and the country, which was to inject new vitality, not least into the Fed ‘s approach to banking. stability. The result was that a career that began wonderfully by hedging the low inflation achieved by Paul Volcker left a legacy of vulnerabilities in the financial system that upset the world and exacerbated tensions in America’s social structure.

But the case for reform does not rely on history, even if it is instructive. If, as many expect, the Fed acts next year to take back some of the extraordinary financial support injected when the Covid-19 pandemic took over the world, it will almost certainly be questioned whether it would have acted sooner than its leaders have already been reappointed.

And if, as it is not unlikely, the so-called temporary inflation of 2021 become embedded in wage and price fixing, those questions will be posed as accusations. Policymakers will, of course, oppose such proposals, sincerely. But how can we know? Indeed, how can they? The whole point of monetary policy regimes is to form incentives, including their own.

The extraordinary power placed in the hands of our unelected central bankers requires careful design. They need to get office terms long enough to avoid last year’s uncertainties. But it should only be a single term, so elected politicians can not avoid the need for change when a Fed chairman’s term does expire.

It will be said, whatever the merits of this argument, that it is out of the question as a sclerotic congress will not act. But a decent set is to flush out ideas so they are out there when an opportunity window opens.

One can also ask what foreigners like me have to do with this. The answer is easy. As long as the dollar is the world’s leading world currency, we have a large share in the integrity of the US monetary system and its steward, the Fed. With competing reserve currencies, whether from the cryptosphere or a new superpower, hovering over the horizon, it is imperative for the free world that Washington get its monetary house in order.



Source link

By admin

Leave a Reply

Your email address will not be published. Required fields are marked *