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Anatole Kaletsky: A central banker’s ‘license to lie’

Federal Reserve Chairman Ben Bernanke, who retires this week as the world’s most powerful central banker, cannot be trusted.

Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve.

And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on.

I am not trying to aim a valedictory insult at Bernanke or his central banking colleagues. On the contrary, I am drawing attention to the skill and determination required by central bankers to perform one of the world’s most demanding and important jobs. For just as James Bond has a “License to Kill” in the Ian Fleming books, so central bankers possess a “License to Lie” — or, putting it more diplomatically and politely, to make promises about the future that cannot be honored and often turn to be false.

Nobody ever blamed a central banker for promising to support the currency and then suddenly allowing a massive devaluation — as happened in Argentina last week and may soon happen in Turkey, Ukraine, Russia and many other emerging markets.

To mislead investors is actually a key skill required by a central banker’s job description. Revealing the true state of national finances at a time when a devaluation or comparable financial crisis is looming might be to guarantee the loss of the central bank’s entire reserves.

In the days when developed economies managed their exchange rates, it was taken for granted that whenever a central banker appeared on television categorically to rule out devaluation, support for that currency was about to be withdrawn.

When managed currencies collapse in emerging markets, the popular anger and accusations of dishonesty are always directed at political leaders, such as Argentina’s President Cristina Fernandez de Kirchner. In developed economies, too, when central bankers commit themselves to inflation targets or assure their nations that they can avert financial crises, or revive economic growth, nobody blames them when these promises turn out to be false. In Cyprus, for example, the one public official who survived the banking debacle was Panicos Demetriades, the governor of the central bank.

Yet despite this historic record of broken promises and unfulfilled commitments, central bankers enjoy more respect and trust than any other public official. They are particularly trusted by the people they most frequently deceive — financial market investors.

Which brings us to the state of the world economy today. This week’s financial headlines have been dominated by the currency chaos in Turkey and Argentina, but the deeper problem has been a new bout of uncertainty about global economic prospects — and especially about the commitment of the Fed and other major central banks to continue stimulating economic growth.

On this score, some of the most unsettling news has come not from Argentina or Turkey, but Britain. This was Carney’s admission last week that his promise of July to keep interest rates near zero until 2016 would need to “evolve” in view of last year’s rapid decline in British unemployment.

Carney’s U-turn was significant because he was the man who, in his earlier position as head of the Bank of Canada, invented the concept of this kind of “forward guidance” as a monetary policy tool. His success in steering the Canadian economy through the 2008 economic crisis by promising to maintain what were then viewed as low interest rates, inspired central bankers around the world to believe that words could be an effective substitute for monetary actions.

Last year the Bank of England went even further than the Fed in developing forward guidance by laying down precise criteria for considering an increase in interest rates. Carney stipulated the key condition was a 7 percent unemployment rate and said he expected Britain to reach this threshold only in 2016. Instead, this unemployment rate now looks likely as soon as next month — thereby discrediting the entire approach to forward guidance and policy transparency. Which he and Bernanke pioneered.

If Carney was forced by events to retreat from his commitment to forward guidance, should we conclude that forward guidance from other central banks, including the Fed, has become “inoperative,” to use President Richard M. Nixon’s euphemism for his lies about Watergate? If so, then the panic in financial markets makes sense.

After all, forward guidance was how Bernanke and Yellen managed to calm down last summer’s “taper tantrum.” When financial markets panicked in response to suggestions that the Fed would gradually reduce or “”taper” its monetary stimulus, Bernanke reassured them by essentially promising not to raise interest rates until at least 2015.

After this reassurance, the market tantrum calmed down — and the tapering process began calmly enough in December.

As a result, forward guidance was assumed to be the strongest remaining weapon in the armory of the Fed and other central banks. But this month, the financial tantrums started again, ahead of the next stage of monetary tapering, which the Fed announced on Wednesday.

The question now is whether the Fed can restore the market belief that easy money is here to stay — at least until the United States returns to sustained economic growth and full employment, which cannot possibly happen until 2015 or beyond.

History suggests that such promises from central bankers can never be fully trusted. And the recent experience in Britain confirms this.

Yet despite this historic record, Yellen will probably succeed in restoring faith in the Fed’s commitment to continuing economic stimulus and easy money. And not just because of her personal credibility, which is strong but not any stronger than Bernanke’s. The reason for confidence is the fact that continuing stimulus and easy money are the only economic policies that will serve the Fed’s institutional interests — and the U.S. national interest — between now and 2016.


Anatole Kaletsky is an award-winning journalist and financial economist who has written since 1976 for The Economist, the Financial Times and The Times of London before joining Reuters.

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Posted: January 30, 2014 Thursday 04:43 PM