Opinion | Post Lehman: Are central banks too powerful?

The 10th anniversary of the collapse of the Lehman Brothers later this week is a moment to reflect, especially on the factors that triggered a global contagion—something that had threatened to annihilate the world economy, but was eventually prevented, albeit at a huge cost. Because, if nothing, the crisis effected by the fourth largest financial institution on Wall Street can recur if we continue to ignore the causes. But given that public memory, especially for uncomfortable experiences, is short, there is the risk that the anniversary would pass as just another day.

Nonetheless, there are many issues the Lehman Brothers collapse highlighted. Most important is the deadly outcome of wanton greed combined with crony capitalism, which ensured that several administrations in the US progressively reduced regulatory oversight of investment banks—allowing them to undertake the kind of risky bets, which in stock market jargon are nothing but punts, and not based on logic and reasoning you would expect from such highly paid Wall Street bankers.

For those looking for a quick catch-up, check out the documentary, Inside Job, available on Netflix; especially the pithy explanation of the crisis provided by George Soros. The 90-minute feature is a stunning expose of this avarice, which triggered the worst crisis since the 1928 depression. Yes, the world economy survived, but at what cost? Not just the fiscal resources that had to be pumped in by governments the world over. Millions lost their jobs in the disruption that ensued—as the documentary points out, the biggest price was paid by those at the bottom of the pyramid, while the system ensured the guilty got away and with millions of dollars in bonuses.

Also read | The crash on film

This apart, the second big fallout was the empowerment of the central banks. The role they played in staving off the crisis—which in itself was remarkable and commendable—transformed the status of central banks, which acquired regulatory independence only a few decades ago.

The big question is whether it is fair? After all central banks are manned by technocrats and not elected politicians. And the decisions they take, like in the case of unwinding of the quantitative easing by the US Federal Reserve, have huge consequences.

It is only fair to expect that elected politicians have a say, instead of officials twice removed from the electorate. It is a vexing question indeed, especially for a developing country like India; the spike in recent off-the-record run-ins between the Reserve Bank of India and the Union finance ministry are an indication that this question has already wound its way into the public policy discourse.

Addressing this dilemma is a terrific book by Paul Tucker, the former deputy governor of the Bank of England. The book, Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, explores the possibility of finding a legitimate place for technocratic independent agencies, without jeopardizing democratic legitimacy.

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“If we must lift our eyes to that broader context in order to meet the challenge of whether society risks central banks and their leaders becoming over mighty citizens, then we need to confront deeper, higher-level questions about the legitimacy of delegating power to unelected officials more generally,” Tucker writes.

Clearly, the lines need to be redrawn, but without sacrificing regulatory independence. The key to riding this fine tension, Tucker rightly argues, is a public debate and broad political support preceding policy change.

People have to be stakeholders in the conversation and in a democratic framework, this can only be through the elected politician.

Unfortunately, in the political climes of today, this is easier said than done. There is, especially when you look at the US Congress or the Indian Parliament, a growing democratic deficit, as political partisanship has begun to dominate the discourse.

The rise and temptation of populism in the post-Lehman world, largely an outcome of the backlash against corporate excesses leading up to the crisis, has only deepened this political divide.

Regardless, as Tucker argues, the power of unelected technocrats vested with delegated discretionary powers need to be reviewed, if not recalibrated.

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics. His Twitter handle is @capitalcalculus.