The secret is out. Central bankers are not deities, as much as we might have sometimes wished to attribute them with almost supernatural powers. Post-mortems on the surge in inflation and how it got away will run for years. Let's not forget to look in the mirror: Did officials accrue too much influence and was society a willing accomplice, only too eager to confer that authority?
These are some of the uncomfortable questions that lurk behind a paper co-written by a former Reserve Bank of New Zealand chief, but its lessons go much wider than a little country of 5 million people in a corner of the Pacific.
Graeme Wheeler, who led the RBNZ for five years, and Bryce Wilkinson, a former Kiwi Treasury official, argue that central bankers the world over became too confident in their own abilities and, alongside fiscal agencies, injected way too much money for too long for economies to handle.
This problem was close to universal. Salvation, the authors say, may lie in fessing up and central bankers going about their business with a new and profound sense of humility.
Critiques of monetary policy are proliferating everywhere. It is a common feature of Federal Reserve Chair Jerome Powell's congressional appearances: The Fed waited too long, the legislators seem to convey, but we are glad you are on the case now! Australia has launched the first external evaluation of its Reserve Bank in at least a generation.
Liz Truss, running for leadership of the UK's ruling Conservative Party, raised eyebrows when she suggested that the Bank of England might do well to emulate Japan, notwithstanding its central bank's struggle with deflation. What is striking about Wheeler's condemnation, published by think tank The New Zealand Initiative, is that it is from a member of the club. Central bankers are generally loath to take on each other in public. It's also worth listening because the RBNZ was the first to adopt a formal inflation target three decades ago, now commonplace.
To this damning appraisal, I would add a liberal amount of culpability from investors, politicians and, yes, the financial media who tended to personalise central banks — the "Greenspan put," the "Bernanke Fed'' and so on, and to heap vast praise during good times.
Cults of personality sometimes developed; Fed bosses Paul Volcker and Alan Greenspan, sure, but Mario Draghi, formerly of the European Central Bank, has also been credited with a sense of superpower.
And huge authority has been bestowed on — and amassed by — central banks. In many ways, this is entirely understandable. As institutions, they can act quickly to stimulate an economy or rescue a failing bank, unlike the lumbering legislative process and all its sausage-making.
Giving them inflation goals, and the autonomy to pursue them, offered the best route to long-term price stability. Wheeler and Wilkinson acknowledge the benefits, but say policy makers became complacent: "They seemed to downplay the role played by positive supply shocks associated with globalisation… They believed that when Covid restrictions were eased inflation expectations would remain anchored."
Fair enough. Having heard naysayers cry "wolf" plenty of times, central bankers can be forgiven for scepticism that a price spiral lurked around every corner. Greenspan stared down hawkish colleagues in the 1990s; he thought technological innovation had boosted productivity enough to negate concerns that a boom would ignite inflation. He was correct.
In the aftermath of the Global Financial Crisis, a group of mostly conservative economists and investors wrote to the Wall Street Journal predicting that the Fed's quantitative easing would lead to a massive outbreak of inflation and debasement of the dollar. Neither happened. In 2017, Janet Yellen called MIA inflation a "mystery." Now Treasury secretary, she is being forced to defend downplaying the price eruption last year.
Wheeler and Wilkinson chastise central banks for over-egging the economy during the pandemic as government budgets were doing the same. However, a big lesson policymakers took away from the 2007-2009 slump was that they should have responded sooner and more forcefully.
When Covid came along, they weren't going to be accused of dawdling. And who was to say that fiscal policy would have enough impact? Another powerful narrative of the recovery from the subprime bust was that budget support was withdrawn too quickly, making the rebound slower than it might otherwise have been. The 2010 US midterm elections ushered in Tea Party Republicans with an anti-tax, anti-spending agenda. A wave of austerity swept Europe.
Politicians, who derive their authority from popularity and the ballot box, have been only too happy to let central banks do the unpopular work. They can act fast, impose pain or release pressure when needed with alacrity. That spares cabinets and legislators from getting their hands dirty — and also provides a scapegoat when things go wrong.
Spare a thought for the European Central Bank: It has to work magic in the absence of a common fiscal policy. Arguably the most celebrated phrase in 21st-century economics was Draghi's "whatever it takes'' pledge in 2012 during the euro's debt crisis. No wonder "Super Mario" was lauded as Italy's saviour when he became premier a decade later. (His government collapsed in July amid factional bickering.)
Central banks are well-crafted for emergencies. "It is tempting for everyone — executive and legislative branches, commentators and the public — to look upon them as a financial US Cavalry,'' Paul Tucker, former deputy governor of the Bank of England, wrote in his 2018 book Unelected Power: the Quest for Legitimacy in Central Banking and the Regulatory State.
Tucker fretted that authorities could become too dominant. Wheeler and Wilkinson might agree. For lenders of last resort to do their jobs, they need significant clout and some perception of invincibility — something too easily conferred. Heaven forbid anyone challenges them or raise an eyebrow too often.
How many times have you heard, or said, "You're compromising their independence, recant now!" In attributing blame for today's economic travails, we could do worse than look in the mirror.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
Disclaimer: This article first appeared on Bloomberg and is published by special syndication arrangement.