In business or public life, when somebody quits for “personal reasons” it’s usually an attempt to keep the lid firmly sealed on a bulging can of worms.
Occasionally the reason might be infidelity or a serious illness, but more commonly the formulation is employed to avoid an embarrassing and damaging public airing of an almighty private row. It seems to have caught on among the world’s central bankers this year — and we should all be worried about the implications.
The Reserve Bank of India’s Urjit Patel suddenly found he couldn’t carry on for personal reasons and quit this week, just over two years into a three-year term. The RBI is a notionally independent central bank, but has come under huge pressure from Narendra Modi’s government to loosen policy and to channel its reserves into public spending ahead of next year’s elections.
Modi had already turned the screw in the summer by appointing key ally Swaminathan Gurumurthy to the RBI board, in effect parking political tanks on the bank’s lawn. It was the final straw for Patel, supposedly the RBI’s low- profile successor to “rockstar economist” Raghuram Rajan.
In Argentina, another notionally independent central bank boss, Luis Caputo, stepped down “for personal reasons” after just three months amid reports of a huge row with the finance minister as the country sought IMF support. And there were more such “personal” reasons invoked by Brazil’s acclaimed central banking chief Ilan Goldfajn three weeks ago, who has decided to step down in the wake of Right-winger Jair Bolsonaro’s election triumph. Bolsonaro’s pick, Roberto Campos Neto, is the grandson of a minister in Brazil’s former military junta.
These are only the more egregious examples of political interference in the central banking sphere this year. According to Central Banking magazine, 30 top bankers left their post this year compared with 25 the year before.
In Turkey, at another “independent” central bank, strongman president Recep Tayyip Erdogan has put his son-in-law in charge of economic policy and gave himself the power to appoint rate-setters. Erdogan has an utterly barmy take on economics — believing low interest rates are the way to bring down inflation, and once accused a central bank chief of “treason” for not cutting them fast enough. Coming from a man who’s locked away tens of thousands of people, that’s no idle threat. Disobey him at your peril.
By Erdogan’s standards, US President Donald Trump taking to Twitter to call his own choice for Federal Reserve chairman “crazy” seems mild. In Trump-world, the Fed is “too tight” and oil prices are too high even though his own tax cuts delivered a gradually fading sugar rush to growth. For his part Jay Powell retains a dignified silence at the President’s antics. Over here Brexiteers lambast Bank of England Governor Mark Carney when he gives them answers they don’t like.
More political interference in recent times is perhaps inevitable. Since the financial crisis, the array of extra tools given to central banks to meet inflation targets — such as quantitative easing — has affected asset prices, and wider regulatory powers brought them into a tighter political orbit. The rise of the political populist — or a populist movement such as Brexit — is partly a side-effect of 10 years’ squeezed wages but it’s anathema to central banking independence, as strongmen don’t like alternative power centres.
The trouble is that, despite the populist promises, undermining your independent central bank is the surest way to make everybody poorer in the long run. Although politicians set the goals, the reason most major economies have operationally independent central banks in the first place is to help governments to avoid the political temptation to cut rates just before an election and create boom and bust cycles. If governments take the reins and adopt a more laissez-faire approach to inflation, they’re charged a higher price to borrow by more sceptical financial markets: independence equals credibility, which equals lower costs.
Economists Guillermo Vuletin and Ling Zhu looked at central bank appointments over a period of 35 years, analysing the effect of replacing a “disobedient” central bank governor with a “docile” one. They found that premature exits, as well as replacements with government allies, were bad news for the cost of living.
Central banks are by no means flawless; they are run by humans and prone to mistakes. But they’re demonstrably better than politicans in keeping a lid on inflation, which is “as violent as a mugger, as frightening as an armed robber and as deadly as a hitman” in Ronald Reagan’s famous phrase. The meddlers and the strongmen around the globe should heed the warning, or we’ll all pay the price.