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Central bankers did not spoil this party

Central bankers did not spoil this party

A central banker’s job, it’s often said, is to take away the punch bowl just as the party gets going. These days, politicians are trying to keep the bar open.

Australian Prime Minister John Howard is a case in point. On 8 August, Howard said the central bank’s decision to raise interest rates that same day “hurt" homebuyers. That’s code for “no more rate hikes ahead of elections later this year".

In Japan, politicians are out in force before the central bank’s 22-23 August policy meeting. Liberal Democratic Party secretary general Hidenao Nakagawa this week told Bank of Japan governor Toshihiko Fukui that his move to begin raising rates last year hurt the economy, contributing to a 29 July election defeat.

French President Nicolas Sarkozy is calling for governments to have a say in monetary policy. He has accused the European Central Bank of undermining exports and growth by pushing up the value of the euro with rate increases.

Yes, it’s open season on central bankers as politicians search for someone to blame if growth cools or fallout from the US subprime mortgage mess heads their way. Many monetary policymakers are standing firm, and good on them.

William Greider’s concerns about central banks are as potent in 2007 as they were in 1989, when he published Secrets of the Temple: How the Federal Reserve Runs the Country. Concentrating so much power in the hands of a few unelected officials is a dangerous situation.

Yet, at the moment, many central bankers are proving to be the adults in the room as global markets zig and zag, and politicians fiddle.

Australia’s example

Take Australia, which is enjoying one of modern history’s most impressive and seemingly endless booms. For that, former Reserve Bank governor Ian Macfarlane deserves considerable credit, as does Glenn Stevens, who served as Macfarlane’s deputy for five years.

When a nation’s jobless rate is near a 33-year low and stays there for a while, as in the case of Australia, things often heat up. Now, the Asia-Pacific region’s fifth biggest economy has a worsening labour shortage that is driving up wages and inflation.

The central bank this week raised its benchmark rate a quarter point to an 11-year high of 6.5%. It was the fifth rate increase since Howard was returned to office in October 2004.

Stevens cited accelerating inflation, capacity constraints and soaring commodity prices as reasons for raising borrowing costs. And let’s face it, Stevens is right.

The only way for Australia’s boom to stay on track is to keep things from getting out of control. Ditto for South Korea, whose benchmark interest rate rose on Thursday for a second time in as many months to curb asset price bubbles.

Bubble troubles

The bubble troubles of Asia’s recent past are rightfully making officials in Seoul wary. A year ago, Korea was feeling left out of the global equities rally. So far this year, the Kospi stock index has gained 33% at a time when property prices are surging.

Of course, one could argue that many Asian central banks are merely mopping up their liquidity mistakes. A year ago, central bankers were looking suspiciously like Santa Claus, providing ample booze and food to keep the party going. Markets came to expect they would keep the monetary spigots open at all costs.

It wasn’t all the central banks’ fault. Governments did little to clamp down on speculation in property markets, allowing bubbles to appear from Seoul to Jakarta.

The sense of euphoria in the air—and politicians’ unwillingness to tame things—has central banks taking money out of financial systems. It’s a necessary process that, if handled well, could drain the excess liquidity boosting Asia’s currencies and causing volatility in economies.


The boom-and-bust cycles of the past had much to do with compliant central banks that covered up economic cracks with cheap money. Since the dark days of 1997, central bankers have tried to strengthen their autonomy.

It has been a bumpy road, of course. Earlier this year, there were several examples of central bankers from New Delhi to Bangkok to Seoul enacting measures to halt currencies from rising. Such policies tend to come at the behest of politicians.

Still, recent rate increases in Australia, Canada, the UK, South Korea and New Zealand aren’t going down well with politicians concerned that global volatility and the subprime crisis will slow their economies. The same is true in Tokyo and Frankfurt, where officials are laying the groundwork for unpopular rate policies.

Fed up

It’s also telling that the US Federal Reserve is fielding calls to cut rates to bail out Wall Street. Watching Goldman Sachs Group Inc.’s $9 billion (Rs36,630 crore) Global Alpha hedge fund fall along with other recent casualties from New York to Paris to Taiwan has some urging Fed chairman Ben Bernanke to cut rates. While his predecessor, Alan Greenspan, often saved investors’ hides, Bernanke is standing his ground. After all, this may not be the best time to replenish Wall Street’s punch bowl.

There are times when central banks get it wrong—sometimes very wrong. This isn’t one of those times.

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