Asia is way ahead of Ben Bernanke, and not in a good way
It’s been a rough spell for central banks. It started in September 2016, when Raghuram Rajan left the Reserve Bank of India in Mumbai, having decided not to wait for a renomination as governor. Next, the Bank of Italy got slapped for doing its job and addressing a banking crisis; the Bank of England was attacked for looking askance at Brexit, and Donald Trump shunted Federal Reserve chair Janet Yellen aside on a whim.
The common thread is the death of monetary independence that global elites once viewed as sacrosanct. The blurring of the lines between central banks and governments accelerated after the 2008 Lehman crisis.
In the years that followed, Yellen’s predecessor Ben Bernanke and officials at the European Central Bank and Bank of England all scurried down the quantitative-easing rabbit hole, one from which they are still trying to escape. And, oddly, that might not be a terrible arrangement, Bernanke now says—much to the surprise of the economics community.
Toward the end of a rather dry, 48-page Brookings Institution paper, Bernanke recently dropped a bombshell: that direct coordination between fiscal and monetary policymakers isn’t just okay, but even advisable in this “new era” of monetary policy. It’s not quite John Maynard Keynes suddenly coming out in favour of gold (he called it a “barbarous relic”), but it’s blasphemy coming from a Western monetary guru.
Yet the controversy seems a bit quaint viewed from Asia, which is years ahead of Bernanke. What’s more, this region’s experience with overly compliant central banks has already disproved Bernanke’s theory.
Japan, for example, has demonstrated why monetary-fiscal teamwork doesn’t work for over a decade—and especially since 2013. That’s when newly named Bank of Japan (BoJ) governor Haruhiko Kuroda embraced an idea his predecessors dismissed for years: a firm 2% inflation target. Kuroda and his colleagues promised bottomless resources as they pledged to “strengthen policy coordination and work together.”
Since then, the concept of “together” saw the BoJ corner the government bond market, gorge on exchange-traded funds and push its tentacles into myriad other assets to transmit yen into the real economy. But there are two dark sides emanating from Japan’s experience that Bernanke might not be considering—one in the short run, one in the longer run.
One, asset bubbles. Since December 2012, just around the time Japanese Prime Minister Shinzo Abe was hiring Kuroda, the Nikkei Stock Average has surged 130%. No one’s saying Japan doesn’t have a bit more spring in its step these days. But given the dearth of wage gains, investors sure do seem to be getting ahead of themselves.
Two, a bull market in complacency. A highly agreeable central bank relieves pressure on elected officials to do their jobs. Monetary excess deadens the urgency to create well-paying jobs, boost wages, increase competitiveness, implement structural changes and take policy risks. That’s why, five years into Abenomics, there’s nothing self-reinforcing about Japan’s recovery. It’s driven by policy steroids, not organic demand that broadens the benefits of growth.
To monetary guru Barry Eichengreen of the University of California, Berkeley, giving elected officials control creates more problems than it solves. “Compromising central bank independence in order to enhance political accountability would be to throw the baby out with the bathwater,” he says. “Monetary policy is complex and technical. Returning control to politicians is no more prudent than handing them the keys to a country’s nuclear power plants.”
China also is worth considering, as central bank governor Zhou Xiaochuan prepares to retire. There is no separation between monetary and fiscal functions in Beijing, of course. All economic arms work in service of the Communist Party. Free-flowing liquidity from the People’s Bank of China helps keep growth near 6.7%, but it enables smugness. That steady and reliable largess lets President Xi Jinping punt painful structural upgrades forward, year after year.
A first step toward sobriety is Xi scrapping Beijing’s annual gross domestic product growth target (this year’s is 6.5%). It incentivizes unproductive investments, bad development decisions, graft, overcapacity and puts the quantity of growth ahead of quality.
What of India? Rajan’s handiwork in 2013 helped stave off a credit crisis, paving the way for the 17 November upgrade by Moody’s Investors Service, the first since 2004. Rajan’s successor, Urjit Patel, has done a decent job. Yet, Patel could’ve shown more independence in November 2016 when Prime Minister Narendra Modi rolled out his demonetization gambit. Patel also mustn’t become an extension of the government, Modi’s ATM, should growth weaken.That’s true of all central bankers.
Bernanke may have a point that monetary officials shouldn’t be in the habit of “ruling out temporary periods of monetary-fiscal coordination that may be essential for achieving key policy goals.” That’s particularly so when markets are plunging, 2008-style. Yet it’s a slippery slope, something Asia continues to demonstrate. Bernanke, who until 2014 ran an institution that defends its independence tooth and nail, should know better.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek.