Era of ‘miracle men’ in central banking bl-premium-article-image

S. Balakrishnan Updated - March 12, 2018 at 06:28 PM.

The latest addition to the ‘wunderkind’ of central bank chiefs is Raghuram Rajan.

Raghuram Rajan…The right choice

Are there magic wands and tools of monetary management?

At least, the powers that appoint central bank heads seem to think so.

First off the mark was George Osborne, Britain’s Chancellor of the Exchequer. He needed to find a successor to Mervyn King, the retiring Governor of the Bank of England. Osborne felt none at home was qualified.

He turned to Mark Carney, Governor of the Bank of Canada, who recently became the BoE head.

Osborne’s hope is Carney will find some entirely unthought of tools of monetary policy which will, miraculously, engineer a turnaround of the economy.

For, it’s not that King didn’t try. Britain’s interest rate is an all-time low of 0.5 per cent and it has its own programme of ‘quantitative easing’ — short for central banks’ bond buying.

Simple logic

While the BoE was in ultra-easing mode, Osborne was tightening the fiscal. In short, he was ‘antidoting’ his own central bank.

The Chancellor’s logic is absurdly simple. Balance Government’s books and businessmen losing sleep over government finances will suddenly reinvigorate themselves and invest and create new jobs.

Demand is the last thing business is bothered about. Yes, such stuff has a large following among economists. It hasn’t worked. So the call for Carney. In the US, a titanic battle to succeed Bernanke at the Fed rages between Janet Yellen and Lawrence Summers, with Obama said to favour Summers for his ‘brilliant’ mind. Pro-Summers quarters talk of his ‘out of the box’ thinking and ‘ability to manage crises’.

‘Ability to create crises’ is more like it, considering his trillion-dollar mistake in stopping derivatives regulation before the 2008 financial crash.

Proved right

The latest addition to the ‘wunderkind’ of central bank chiefs is Raghuram Rajan, just made Governor of the RBI.

Like Osborne, India’s Finance Minister (he must think if he’s in Osborne’s company on this, it must be good) has chosen a person who left India’s shores long back.

No doubting Rajan’s general competence. For he crossed swords with the formidable Alan Greenspan and Summers (perhaps it’s more accurate to say they did so with him) in 2005 over his view that an outsize and still growing financial sector was altering the balance of risks in the US and global financial system. Rajan was virtually shouted down but proved right. (Shades of Eddington-Chandrasekhar).

Getting the better of Greenspan and Summers intellectually makes him more suitable to head the Fed, one would think, although his name is not in any short list.

Miracles from monetary policy? One thought Keynes worked it out over 80 years ago — none’s possible. There comes a time when one must face the realities of the real economy. And the very, very finite limits of monetary action. For a man of his intelligence, one’s sure Rajan knows this. But will his masters listen?

(The author is a Chennai-based financial consultant.)

Published on August 8, 2013 15:57