Again, with the central banks. The Financial Times' Martin Wolf leads off Wednesday, with a column reviewing the plight of the central banks. Wolf's column, "After the bonfire of the verities," essentially replays the points made in an FT analysis piece over the weekend, just does it more briskly, or more Wolfian, though I was slightly disappointed not to find that typical ticking off of important points he often favors. As I wrote in a post Monday, the FT weekend analysis was a sort of counterpoint to Paul Krugman's New York Times Magazine essay that attempted, as nicely as possible, to suggest that Ben Bernanke had sold out his better academic self to the Federal Reserve's in-house soul-snatchers. The FT was worried that central banks were too exposed politically after too much activism; Krugman thought the Fed under Bernanke shouldn't worry about the likes of Rick Perry or Ron Paul -- who Krugman debated on Bloomberg Television Monday -- and merrily reinflate. Are we up to speed now?
As for Wolf, most of this is pretty standard. Central banks during the financial crisis were "forced into historically unprecedented monetary easing." This raises fears of hyperinflation, while low interest rates and bank bailouts have folks angry. They don't get credit for saving the world. In fact, they've succeeded in just getting folks mad at them. "The theoretical transformation [of central banks] is an indirect result of the crisis. The list of assumptions that turned out to be false is lengthy: that the financial system would be self-stabilizing, that managers of banks would prove competent, that financial innovation would improve risk management, that low and stable inflation would guarantee economic stability. We have witnessed a bonfire of the verities." Ta-dah!
Wolf is worried about central banks once they dig out of this mess, say somewhere in the 2020s, which is as long a time frame as Obama's get-out-of-Afghanistan plan, with a ton of things that could go very wrong. Only at that point does the "new world of post-crisis central banking" begin. What are the outlines of that new world? Well, it sounds a lot like the old world. First, central banks need cooperation between fiscal authorities, regulators and managers of monetary authority. Second, they need good relations with the ministry of finance (or Treasury), which I could have guessed. Third, "the centralization of authority in one institution carries its own risks of insufficient airing of differences, groupthink and ultimate failure." I'm quoting here because I'm not sure what that means past the point that bureaucracies better cooperate, which is point one. Oh, and four: Globalization makes overseeing banking difficult. That, and some intellectual challenges, like trying to figure out how to balance finance stability and monetary policy.
So even Martin Wolf had an off day. There's nothing here that's particularly wrong; it's just that there's little (well, none) that's new. And yet, the plight of central banking, in this fraught moment of income inequality, a euro-zone collapse, global imbalances, tectonic shifts and political polarization, is a rich subject. Wolf is right about the bonfire of the verities -- but he doesn't take it far enough. Savonarola, of the original bonfire, wanted to scorch men's souls, transform them, save them. This bonfire threatens to cleanse economics, macroeconomics in particular. That doesn't mean it will (or that it can), but the current debates within the discipline (as opposed to what occurs in the public square) really threaten some fundamental theoretical truths -- not unlike what occurred in the '30s with Keynes. Now there's no Keynes that I can see, but the debates over efficient markets, equilibrium (I posted recently on that here), relations between microfoundations and macroeconomics, model building, governance and the nature of economic man threatens -- at the very least -- to rob central banks and central bankers of some of their mystery and authority, and expose them to politicians, many of whom crave their power, if not their responsibilities. That intellectual uncertainty can be very treacherous. The financial crisis was bad enough; the failure of the euro zone, that attempt to drive political integration through economics, is worse. Why should central banks have independence if they can't predict the future (hint: they never could) and the technical discipline that shapes them is in turmoil?
These technical arguments tend to pass over the heads of most voters, who frankly don't know or care what the Fed does. This wouldn't matter so much except that economics is viewed as not only important, but determinative. This centrality of economics paradoxically produces another threat to the foundations of central banking: increasing democratization and populism, focused and stirred by economic woes. Economists are in an odd position here. On one hand, they are popularly afforded savant-like powers, even now. Popular pundits like Krugman speak with head-hammering authority not only on economics, but on any number of other socio-politico subjects, from regulation to political campaigning (Krugman thinks Obama is cooked unless he explains economics better). They tend to downplay conflicts within the profession because it robs them of authority and no one would grasp the issues as easily as, say, arguing for stimulus. This feeds off a sense in academia (and it's one that's not necessarily wrong) that outsiders can't (or won't) master the deeper methodological and philosophical issues, particularly given how mathematical it's gotten. This creates a tension between what you talk about and what you pass by: Just like central banking, economics wants to speak politically, but doesn't necessarily welcome a response. In Krugman, it sometimes comes across as condescension. At the Fed, it can appear more sinister.After Krugman's debate with Paul, he knocked off a short post that summed up some of the difficulties of a technical discipline entering the increasingly democratized (and volatile) public square. Writes Krugman, decrying the face-to-face debate:
Think about it: you approach what is, in the end, a somewhat technical subject in a format in which no data can be presented, in which there's no opportunity to check facts (everything Paul said about growth after World War II was wrong, but who will ever call him on it?). So people react based on their prejudices. If Ron Paul got on TV and said 'Gah gah goo goo debasement! theft!' -- which is a rough summary of what he actually did say -- his supporters would say that he won the debate hands down; I don't think my supporters are quite the same, but opinions may differ.
Krugman is an academic and a columnist, not a central banker. One can sympathize with him, though I suspect the libertarian faithful feel the same about him. The irony here is that much of what Krugman puts forth isn't terribly debatable among many of his peers; and if it is, it's not fundamental. But Krugman and many of the best economists today find themselves in the uneasy role of the central banker. They have these formidable skills and tools that the world demands and pays for readily in money, power and prestige. But the ground is shifting, uncertain and soft.
Robert Teitelman is editor in chief of The Deal magazine.