Politicians Put Eggs in Central Bank Basket – Big Mistake

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Published : December 18th, 2012
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Category : Opinions and Analysis

 

 

 

 

This WSJ column($) offers a timely warning (alternate link here) for elected officials around the world who continue to think that many of the world’s financial woes can be solved by central bankers. Politicians remain oblivious to the refrain heard outside of government and financial centers that past actions of central bankers are responsible for at least a share of our current troubles and that’s not really a good thing.

Excessive praise for central bankers from politicians is rarely a healthy sign. The whole point of making these guardians of monetary policy independent was so that they could be a restraint on the inflationary tendencies of politicians.




So when the U.K. Treasury referred to Mark Carney last week as “the outstanding central banker of his generation” —before the Bank of Canada chief has even taken up his new post as Governor of the Bank of England—alarm bells rang in some quarters of the City of London.

After all, politicians used to say similar things about the Federal Reserve’s Alan Greenspan until his reputation collapsed along with the global economy. These days, it’s his predecessor, Paul Volcker, who stood up to politicians as he stamped out inflation in the 1980s, whose reputation now stands tall.

For investors, the relationship between politicians and central bankers has never been more important amid concerns that central bankers, egged on by politicians, are engaged in a race to the bottom in taking ever-more aggressive money-printing actions

The “race to the bottom” characterization is spot on. It’s so much easier for central banks to print money and monetize the debt (this effort soon to transform into debt cancellation, or, my favorite, debt “jubilee”) than it is to deal with the problem of democratically elected governments making promises and then finding out they really can’t deliver on those promises because there just isn’t enough money.

 

 

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Tim Iacono is the founder of Iacono Research, a subscription service providing market commentary and investment advisory services specializing in commodity based investing.
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