Editorial de FT hoy sobre el papel de los bancos centrales, incluyendo la FED.

The current fashion for attacking central banks is understandable but it risks going too far. Whatever mistakes were made before the global financial crisis, the principle of independence is a vital part of modern economic policy-making. To undermine it would be a serious step backwards.

Opposition to the idea of a central bank has a long and colourful history in the US, going back to President Andrew Jackson. Old Hickory’s successor is Republican Ron Paul, who wants the Federal Reserve on a much tighter leash. In Europe, the European Central Bank has been the target of regular bashing by French presidents. Tant pis. The more alarming development was Chancellor Angela Merkel’s attack last June. Germany, after all, cast the ECB in its own Bundesbank image.

Today’s sudden suspicion of central banks contrasts with the past decade, when adulation reached absurd proportions. Alan Greenspan, the long-serving Fed chairman, was widely assumed to have Delphic qualities. The usually hard-headed Senator John McCain once quipped that if Mr Greenspan died, he would prop him up with sunglasses and keep him on.

So the era of economic theocracy, in which unelected experts ran the global economy, is over. But politicians’ lust for control is no guarantee of better economic management. To rebuild the edifice of global finance, the pillars that held it up must be preserved and strengthened, not torn down. Although central banks failed to prevent the crisis, independent central banking was one of the successes. More political control is the wrong response; we must put their independence to better use.

The principle behind independence was that the central bank would pursue a government-mandated objective with discretion on how to achieve it. This way, it would be more insulated from political pressure and thus more likely to stick to a firm course. The overriding objective was low and stable inflation.

Central banks fulfilled their mandate remarkably well; arguably, too well. The Fed kept interest rates low when China’s growing trade with the world created a powerful deflationary force among its trading partners. Letting prices fall might have been the best adjustment to this shift. Keeping them stable contributed to overleverage that fed the credit bubble.

Leverage must be controlled to stabilise not just prices, but the financial system as a whole. This can be achieved by a host of institutions and regulators, but the buck must stop in one place. There must be a lead body orchestrating policy somewhere. Given the role of liquidity in financial stabilisation, that somewhere should be a central bank imbued with enough independence to make hard calls.

Of course, a systemic stability role inevitably drags a central bank into the political mud pit. The risks are greater when a regulator plays God, deciding which banks should live or die in a crisis. Look at the tug-of-war over Fed chairman Ben Bernanke’s role in Bank of America’s takeover of Merrill Lynch. Critics rightly say central banks lack democratic legitimacy for such steps. But politicians are too vulnerable to short-term pressures to do what must be done (which is why independent rate setting works best).

The dilemma would be significantly eased by resolution regimes for the largest banks that force unsecured creditors to swap debt for equity in a failure. Immediate and automatic recapitalisation can keep a failed bank’s operations ********ing with new shareholders, removing public policy reasons for rescuing it. Individual banks’ capital adequacy then ceases to be a systemic concern. Achieving this must be a top priority, since it frees a systemic regulator to focus on capital in the financial system as a whole.

That job is best done by central banks, who have the tools to do it. They must not now be prevented from using those tools. If central banks are no longer responsible for individual banks’ survival, they are less likely to miss the systemic wood for the trees, and they can avoid being caught in political crossfire. A proper resolution regime that lets big banks fail would make independence politically simpler.

Independence does not mean no accountability. Price stability mandates were effective because of institutionalised forms of reporting. These should also be designed for a mandate to prevent systemic overleverage. This is hard – not least to define the target to which central banks can be held. But their independence must be safeguarded. Imperfect though it is, the alternatives are far worse.

Copyright The Financial Times Limited 2009

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