The protests in Frankfurt yesterday outside the offices of the European Central Bank may have had a "rent-a-mob" component, resembling previous violent affairs targeting G8 and World Trade Organisation meetings. But they may be part of a broader trend. Central banks are at the heart of economic policy, supporting governments with their bond purchases and the economy via zero rates, deciding whether or not to offer liquidity to individual banks and national banking systems. Inevitably, the role of these unelected technocratic bodies is going to be subject to democratic scrutiny.
What is slightly odd is the direction from which this criticism is coming. The Frankfurt protesters focused on the ECB's role as part of the dreaded "troika", imposing austerity in Greece as elsewhere. But that rather ignores the role played by the ECB in 2012, when Mario Draghi's "whatever it takes" pledge stabilised the financial markets and the European economy. And it also ignores the ECB's just-launched quantitative easing programme which, by buying €60 billion a month of bonds, makes it easier for European governments to fund their social spending more cheaply. Indeed, German resentment of the ECB is based on the fact that the bank is making it too easy for spendthrift European countries to avoid much-needed reform.
Criticism of the ECB comes from both left and right. On the other side of the Atlantic, the criticism comes largely from the libertarian right. The Audit the Fed movement wants to subject the US central bank to much closer scrutiny; examining its bond portfolio, for example. At root, the critics dislike the Fed's use of quantitative easing, both for the way it helped bail out the banking sector and for the way it helps the Obama administration to fund its deficit. This offends the free market, small government philosophy of the movement.
Historically, support for this movement is a curiosity. In the late 19th century, William Jennings Bryan led a revolt of the farmers in "heartland" states against a tight money policy and in favour of bimetallism which would both inflate crop prices and reduce the burden of farm debts. The eastern states were seen as dominated by the "hard money" interest. Now the views have switched. It seems doubtful that voters in the heartland states have turned into rentiers worried about the return of inflation; they have debts like everyone else. Another puzzle is that some of the most prominent opponents of the Fed's QE policy are hedge fund managers who must have benefited from the way that QE has boosted asset prices. Indeed, one might have expected this development to have led to criticism of the Fed from the left, not the right.
Whether or not one agrees with the specific criticisms of the ECB or the Fed, this is an important issue. Janet Yellen and Mario Draghi are very important players in the world economy, arguably more important than the US President or the German chancellor. And yet they are not elected; if voters do not like the job they are doing, they cannot get rid of them. Governments can in theory sack them, although it would be very difficult; they are appointed to fixed terms. The very act of dismissal would risk financial and economic turmoil.
This independence has been granted because these people are experts who can make a disinterested assessment of the economic outlook when setting rates. But they do a lot more than set rates. Stephen King wrote in his book "When the Money Runs Out" that
Once regarded as mere monetary technicians, their decisions today have less influence on the level of economic activity and more on its distribution
The rise of central banks is part of a wider movement to put technocrats in charge of more areas of policy, in response to the short-termist tendencies of elected politicians. But it seems to me there are three problems with this. The first is that there are many areas of policy, including economics, where there is no "right" view on which experts agree. The second is that experts have got it very wrong, including indeed the central bankers who allowed the credit bubble to develop. The third is that technocracy is an implicit rejection of democracy itself which, for all its faults, is the best system available.
The more power central bankers accumulate, the more criticism they must expect.
Source: http://www.ft.com/intl/cms/s/0/98a1fe0a-d13c-11e4-86c8-00144feab7de.html#axzz3VCaxl5vU
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