BS from the BIS?

I see that the Bank for International Settlements has released their latest annual report.  I have not read it, but will place it here to peek at later.

However, if this (great) post from Ryan Avent is to be believed, it sounds like I will not like this report very much.  I’d also note that this report led Lars Christensen to pop this post back up on Twitter (it reminds me of Lords of Finance – the BIS took quite a hammering in that book).

Towards the end of Ryan’s post he quotes this from the report:

Although central banks in many advanced economies may have no choice but to keep monetary policy relatively accommodative for now, they should use every opportunity to raise the pressure for deleveraging, balance sheet repair and structural adjustment by other means.

This is absolutely and totally shocking – I’m having to convince myself it is somehow out of context to prevent an accidental blog rage 😉 .  I was going to write something, but then I realised Ryan said it better than I ever could:

No. They should not. Central banks—small, elite, technocratic groups given as much independence from political pressure as is institutionally possible—should absolutely not use every opportunity to raise the pressure for structural adjustment. Central bankers have been given a phenomenal amount of economic power: relatively untrammeled control over the unit of exchange and, by extension, over the demand side of the economy. Use of that phenomenal power to influence control over other aspects of the economy—including budget decisions, labour-market regulations, and the benefit structure of old-age pensions—is wildly outside the purview of the central bank and sure to prove corrosive to the independence of the central bank and the democratic process.

Part of the parcel of reasons why I’ve been defending central banks against politicians over here suggesting they should do EVERYTHING is because it is wildly inappropriate (lately here and here).  Not only is it outside their mandate, but as I noted on this bubble post, it violates democracy pushing decision making towards a technocratic elite who “know best”.

The point of an independent central bank IS NOT so that technocrats can do fancy things without needing a democratic mandate … it is actually just the way democratically elected governments tie their own hands with regards to monetary policy, just monetary policy.

All these other “structural” policies in the broad economy, they should be determined by our democratically elected government.

If technocrats/economists are not able to “persuade the public” about risks, this is not a reason to use public office to “force” the public to accept this – it is instead a call to try to make your argument more compelling, and to learn to accept that sometime society may not agree!  I’m not a political scientist, but a situation where unelected technocrats punish us if we don’t do what they think is right doesn’t sound like the right way forward …

And here is something I would note.  By trying to force technocrats to impose these structural policy, taxes, costs, and adjustments a democratically elected government would be merely trying to hide the fault for (provide misinformation about) introducing unpopular policies – in itself, a move that seems undemocratic.

Update:  Lars Christensen discusses these ideas with regard to accountability and the “number of targets“.  I completely agree – this combined with the benefit to communication is why I am a fan of clear concise and separate targets for different authorities.  The idea of “why” we give independence and the level of accountability are things we should be discussing – and an area which the Greens have opened up for debate.  After NZAE I intend to start blogging some of the literature discussing this and trade-offs 🙂 … I see NZIER decided to kick that off in any case!

Update 2:  Brennan McDonald raises his concerns about Basel.  I have sympathy for this view – these actions in the name of “financial stability” do have an allocative impact, an issue that is important to try and understand.

Update 3:   Economist’s View points out a bunch of posts – good posts – also frustrated at the BIS report.  I am not sure whether I should read this report anymore 😉 – jks, read everything especially when it disagrees with your priors!

Update 4:  James sent me an Economist article disagreeing with the RA one here.  It stated:

Countries that misallocated resources to the sectors that boomed before the crisis, such as construction and finance, are being held back from the necessary adjustments by rigidities in labour and product markets. Supply-side reforms are needed to break down these barriers but loose monetary policy reduces the pressure to force through these painful changes.

I decided to pop in a response in my email to James:

I’ll link to that, but this is one of the reasons why I still favour flexible inflation targeting – if it is true that the government has munted the supply side, expected inflationary pressures will rise before we hit our prior trend, and a demand focused central bank will start lifting interest rates.  It is still demand management, and the governments choice to f the supply side was theirs.  Furthermore, it is the government, and societies, choice to cut potential output … not technocrats.

6 replies
  1. Eric Crampton
    Eric Crampton says:

    Agree 98%. My 2% disagreement: there are truths that will never be accepted by the public, regardless of how they are packaged. For robustness reasons I still prefer the world where we don’t get to impose dictatorship just because people want stupid impossible things. But we shouldn’t be overoptimistic about the likely benefits of folk activism and the marginal returns from repackaging unpopular truths.

    You’ll probably like the upcoming Nick Cater talk….

  2. Miguel Sanchez
    Miguel Sanchez says:

    I wouldn’t let Ryan’s post put you off reading it. The writers at the Economist seem to suffer a collective sort of cognitive dissonance when it comes to Austrian economics – they find its prescriptions for the future “distressing”, while at the same time praising William White (former BIS chief economist and an Austrian through and through) for foreseeing the financial crisis. Read it yourself and keep in mind that, right or wrong, the BIS is at least being consistent.

    I’m more sympathetic to the idea that central banks should speak up on non-monetary policy matters, but I’m not sure you can make a clean distinction anyway. For instance, when the RBNZ says (as they often have) that high government spending means that interest rates will have to be higher than otherwise, on the one hand they’re simply being transparent about the tradeoffs in their framework (which I think you’d approve of Matt). But it’s also not hard to read it as a not-so-subtle dig at the government – “if you want to get interest rates down (which tends to be a vote-winner), then you’ll need to cut back your spending.”

    • Matt Nolan
      Matt Nolan says:

      Indeed, good points – even if an authority is only focused on monetary policy, they have to communicate how ‘other’ policy changes influence their decision!

      I would state that this makes sense, but trying to influence other democractically elected policy makers through your decisions is outside the scope of a central bank – and is definitely not something I would expect to be recommended. However, on your recommendation I’ll give the annual report a read – probably in about a fortnight 😉

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  1. […] As mentioned in the 2011 piece though, the idea of what is “democratic” is important.  Recently we touched on this by discussing the appropriate scope for independent monetary policy. […]

  2. […] at TVHE, Matt writes about the BIS arguing that structural adjustments and balance sheet restructuring should… without any democratic input. He makes it clear that there has to be some democratic input into […]

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