Central Banks and Central Bankers: Money Supply and Politics Combined
China’s latest financial regulating body a further shift away from central bank independence
News about China’s Financial Stability and Development Committee’s first convening meeting was well reported. Poised to be the “super financial regulator”, this committee is chaired by current Vice-Premier Ma Kai, making it an extremely potent influencer in the financial markets of the world’s 2nd biggest economy. With a ballooning debt level reaching more than 260% of the current economy, President Xi Jinping seems to have empowered the Financial Stability and Development Committee with the mandate for macro-prudential regulation (efforts that seek to combat systemic risk in financial systems) rather than trusting the People’s Bank of China, China’s central bank, with it. The move to create the latest committee headed by the Vice-Premier yet again brings up the topic of Central Bank independence and the famed Central Bankers who lead them.
After the Prime Ministers, Presidents and other key ministers, central bankers are often particularly well-known and in many situations, hold a celebrity-like status in their respective countries. Prominently featured Central Bankers in recent history include Jean-Claude Trichet, Raghuram Rajan, Janet Yellen, Mark Carney and Zhou Xiaochuan. All of them have been covered with much fanfare, but not all of them are at the helm of central banks that have been truly independent. This article will dive deeper into selected Central Bankers and the Banks they represent.
Part of the European System of Central Banks, the Bundesbank no longer wields control over monetary policy decisions after the Euro was introduced in 2002. Despite its reduced prominence, the Bundesbank is recognised as the first Central Bank to have functioned independently. The Bundesbank Model is known to have inspired the current European Central Bank (ECB) and the functioning of many other independent Central Banks around the world.
The Bundesbank is currently headed by Jens Weidmann who has constantly been at odds with the other members of the ECB, often voting against the majority consensus. However, rumours have been aplenty that he is laying stake to the post of ECB president when it becomes available in 2019. While he is close to Angela Merkel, Weidmann is seen as professional and competent by most. As such, we might see him leaving the Bundesbank to take up the coveted role in the ECB in the near future.
Bank of England
Often one of the shockers, the Bank of England is only just set to mark its 20th year of operational independence which was granted to it in May 1997 during the term of ex-Prime Minister Tony Blair. Marked as a move that would reap long-term economic benefits for the United Kingdom as the Treasury was vulnerable to being used to impact interest rates when elections were around the corner, affecting the effectiveness of the UK’s monetary policy.
The Bank of England then took the leap forward when the UK government appointed Mark Carney, a Canadian, as the Bank’s governor in 2013, making him the first non-Briton holding the title since the forming of the Bank in 1694. The political implications of this were tremendous, signalling that the government was keen on appointing the most suitable person to the Bank.However, with the continued prevalence of “quantitative easing”, many have started speaking against the independence of the Bank of England, blaming the efforts to worsening income inequality. Most recently, the Bank of England voted to create the first hike, by 25 basis points, of borrowing rates in over 10 years. Much is left to left to be seen about the effectiveness of the Bank’s “quantitative easing” strategy and fall-out when it starts to sell off the assets on its balance sheet.
People’s Bank of China
Zhou Xiaochun with his nearly 15-year term at the helm of China’s central bank is nearly coming to an end. Once ranked 15th on the 2011 Forbes List of Most Powerful People, Zhou has recently been extremely vocal about the risks of China’s highly levered financial system, a problem that has already been recognised across the ranks of the Chinese Communist Party leadership. The rhetoric could be also seen as an attempt to further dissuade Chinese corporates from increasing their borrowing level which is in line with a debt clean-up operation led by the government.
The formation of the China’s Financial Stability and Development Committee can also mean the People’s Bank of China (PBC) might never see a future where it can independently determine monetary policy. Sticking with its executioner and regulator roles, leaves the world’s biggest central bank, in terms of financial asset holdings, firmly in the control of the government. However, that might not be a bad thing. In an attempt to ensure the Chinese Yuan does not tumble, the Chinese government has shown willingness to sacrifice over $800 billion in foreign-exchange reserves and numerous other regulatory controls to prevent capital flight. This has ensured the Chinese economy hasn’t faced a sudden jerk which could have derailed its growth plans.
Given that the Chinese government hastening its reforms to open up the financial markets to international players, it is left to be seen what role the PBC will take on. In fact, the first task of the Financial Stability and Development Committee is to determine the role of the PBC.
The latest on the future of the Federal Reserve is currently a hot topic in the news. Janet Yellen was the first woman to serve as the Fed chair, but she is also set to be the first Fed chair in recent history to complete one term and not be renewed for another. This is significant, especially given that the Fed considers long-serving governors over multiple presidencies to be a testament to its independence. The recent nomination of Jay Powell has been well anticipated and the President is set to nominate various other individuals to vacant positions in the Fed in the coming months. Overall, while there appears to be a clear attempt to ensure the Fed facilitates the goals of the current administration, the diverse and robust representation within the Fed’s Board of Governors along with the professionalism of the representatives in the Fed will likely ensure that there aren’t any radical changes that result in rapid politicisation of the organisation.
All in all, the central bank systems around the world are designed to enable slow evolution rather than radical revolution. With their various structures, the Central Banks around the world have generally been effective in reaching their goals and their respective structures. The verdict is still not out on whether independent central banks are an inherently superior structure, but with dynamic changes in the market, we might have an answer in the next few years. On the other hand, while focus has been on ensuring financial institutions, such as banks, are safely regulated and structured, one should not overlook changes that need to be made in the Central Banks that regulate the wider economy.
WRITTEN BY VINOD TADIKAMALLA FOR BESA
PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT