The Not-So-Invisible Hand: Central Banks – WSJ

Politicians may debate whether big-government socialism or free-market capitalism leads to better economic outcomes. Their constituents may worry about rising prices and declining prospects for retirement. But neither group has the power to create money with no questions asked, manipulate the cost of capital, or counteract movements in financial markets. The central bankers are in charge and perhaps that should change.

Even if duly elected leaders try to make good on campaign promises, they face hurdles if monetary authorities, domestic and global, disagree. What happened in Britain is a cautionary tale for nations that have relinquished to central banks the keys to economic performance. British Prime Minister Liz Truss, together with her finance minister, Kwasi Kwarteng, last month announced plans to spur investment and economic expansion by cutting taxes for individuals and businesses. Days later, they were verbally lashed by Mark Carney, a former governor of the Bank of England, for working at some cross-purposes with the nation s central bank.

Mr. Carney, who is now United Nations special envoy on climate action and finance, lamented that the new U.K. government was trying to stimulate short-term growth just as the Bank of England was trying to restrain it to control inflation. While the approach championed by Ms. Truss and Mr. Kwarteng aims to expand economic output by providing incentives to increase supply, the Bank of England is committed to fighting inflation by reducing demand which requires raising interest rates to choke off growth. When the budgetary plans were poorly received by market investors, the central bank had to buy long-term government bonds to rescue the pound in foreign-exchange markets causing interest rates to fall.

Then there s the audacity of the International Monetary Fund, which publicly rebuked the U.K. government s budget and urged it to re-evaluate the tax measures, especially those that benefit high income earners.

Since when did unelected monetary officials gain the authority to tell political leaders what to do? It s unseemly, but perhaps not surprising: When government organizations are imbued with breathtaking powers to determine financial conditions, it magnifies their clout and elevates their status.

via www.wsj.com

Yeah, it was a big mistake, setting the Fed up as a semi-central bank back in 1913. But how do you disassemble it now? For one thing, you’d have to do something with all those economists.