The twentieth century witnessed the shift from the classical order of free markets and hard, non-political money – epitomized by the gold standard – to fully elastic money and credit markets under the control of state central banks. This shift was completed in August 1971 with the termination of Bretton Woods, the gold standard’s last surviving, but limp and sickly cousin. Finally freed from the golden shackles that had always been the monetary anchor of capitalism, the global financial system produced, for the past 40-plus years, rapidly growing imbalances and progressively more devastating crises, from Japan in the late 1980s to US subprime in 2007 and 2008, and the eurozone debt crisis more recently.
The underlying problems of elastic money, limitless credit and unconstrained central banking are still not officially recognized as the prime causes of financial disaster but remain beyond reproach in mainstream debate. Instead, central banks are given more powers and become happily more interventionist by the day. Bizarrely, the chief perpetrators emerge strengthened from the mess they created.
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To sell this to the public history has to be rewritten. While nobody can deny any longer that easy money – ultimately provided by the central banks – led to what is commonly lamented as “excessive risk-taking”, the problem was apparently not easy money per se, but rather the central banks not simultaneously focusing on “financial stability” as well. This needs to be rectified now by giving them yet more powers, in particular in the area of bank supervision and financial regulation.
The Financial Times today writes the following about goings-on at the Bank of England: “Mr. Carney, the former Canadian central bank governor, took over last July with a mandate to modernize the Old Lady of Threadneedle Street and ready it for its new sweeping responsibilities of financial supervision and regulation.”
“Criticizing the BoE’s failure under former governor Lord King to focus on financial stability when it had inflation under control, he said: ‘It doesn’t take a genius to see that similar risks exist today’.”
The irony of that statement seems to escape Mr. Carney. These risks do indeed exist today only because the Bank keeps repressing interest rates, yet rather than end this policy the Bank assumes new powers to manage the consequences. As the same paper reported last week, the Bank of England is already looking at ways to restrict bonuses at British banks and to potentially claw back banker pay for up to six years in an attempt to counter a culture of “excessive risk-taking”. That a state bureaucracy now determines how allegedly private enterprises (with the notable exceptions of RBS and Lloyds TSB) remunerate their employees seems to worry no-one.
Central banking is the institutionalized promise of the state to “have the bankers’ backs”, come what may. “Keep calm and keep lending” is the invariable message to the financial system. This renders capitalism’s most effective regulators – profit and loss – ineffective. So now, the central bankers have to do all the regulating themselves.
What we see at work here is the iron law of intervention. No intervention in the market can ever make markets work better. Central banking is a form of persistent market intervention and market manipulation. It is fundamentally at odds with the free market. But when the unintended consequences become too noticeable, as they ultimately must, the political response is to add additional interventions.
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The US Federal Reserve is marking its centenary this year. Its original conception of a fairly passive, mainly non-interventionist “bankers’ bank” was always naïve, as many of its early critics, such as Republican Elihu Root, understood from the beginning. But still, as James Grant pointed out, in the 1950s the Fed would refrain from buying coupon securities out of concern that such operations might inadvertently distort the market. Today, the Fed only buys coupon securities and does so with the specific goal of manipulating the market. The central bank administratively sets short-term interest rates, determines the amount of bank reserves, targets the shape of the yield curve, manipulates risk-spreads on mortgages, and shamelessly boosts equity prices, all for the public good as defined by its plethora of goals and sub-goals, such as maintaining inflation, avoiding deflation, anchoring inflation expectations, lowering unemployment, stabilizing financial markets, stimulating the economy, spreading the benefits of the recovery, and providing general good cheer for those watching financial TV.
The European Central Bank (ECB) is much younger but has already expanded its mandate beyond anything envisioned in the founding treaties. Draghi’s famous promise to “do whatever it takes” (meaning to print as much as it takes) to keep the eurozone together is supported by the new policy tool of Outright Monetary Transactions (OMT), invented ad-hoc and mid-crisis in 2012 and probably illegal and un-constitutional in various places (as can still be ascertained from the verdict of Germany’s Constitutional Court, even if it sheepishly referred the case to the European Court of Justice). Yet it is eminently popular in the easy-money-addicted financial industry, where the logic is usually that the end justifies the means. Soon, the ECB will be in charge of directly supervising more than 120 European banks.
From Manager-Worship to Bureaucrat-Worship
As the tentacles of the central planning octopus reach ever more forcefully into more corners of the economy, the free market is inevitably in retreat. But nobody seems to notice or to care. This is the death of capitalism by a thousand cuts but few people seem to really appreciate what capitalism means any longer. Reading the Financial Times is a borderline surreal experience. It seems thoroughly preoccupied with a small cadre of managers and bureaucrats, the alleged movers and shakers of the world who meet at the World Economic Forum in Davos every year, where the FT’s most senior writers can rub shoulders with them.
True capitalism is, of course, motored by capitalists, by people who use their own money to fund, build and maintain businesses, and who are ultimately risk-takers and, yes, speculators. People with new ideas, with true vision and guts. Managers are employees of the capitalists. They are hired hands, paid to do a job. They are not owners and their downside is limited. This is not meant disparagingly. Managers are needed and good managers will have skills and talents that are not that common. Yet, an unbridgeable gulf exists between the two groups, and there can be no doubt who the true movers and shakers are and always will be under capitalism. Yet, in my view, business reporting has unduly glorified the managers in recent years and decades, a development that was certainly aided by top managers becoming extremely media-savvy, polished and articulate, probably spending more time and effort on honing their public image than managing their companies’ operations day-to-day, and by the fact that the ability to “talk the talk” is what matters a lot to the more cerebral types in journalism.
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The resulting manager-hero-worship is now seamlessly extended to the international bureaucracy. Increasingly there appears to be no difference between Mark Zuckerberg, Jeff Bezos, Jamie Dimon, Sheryl Sandberg, Mohamed El-Erian, Christine Lagarde, Mark Carney and Janet Yellen. They are all part of a powerful international elite, of some imaginary A-list, and they are all undoubtedly influential and probably uniquely talented in their field, yet some of them are capitalists and entrepreneurs, others paid employees, and others high-ranking bureaucrats of tax-payer funded highly interventionist institutions, and from the perspective of how capitalism works, what these individuals do and what their impact is could not be more different. Yet, the various newspapers and magazines reporting on business and markets and allegedly explaining capitalism to their readers are either unaware of these crucial differences or completely uninterested in them. I do not believe that there is any intention behind this. It seems simply part of a general decline in any clear understanding and articulation of what makes the capitalist system unique and what is required to keep it working. Maybe this trend is more symptom than cause.
I was certainly reminded of this when reading the FT today and seeing Mark Carney get the CEO-treatment. One could easily forget that we are dealing with a state bureaucracy here as the challenges were portrayed as those of just another dynamic firm implementing institutional change and a new management structure. The leader writer praised the civil servant’s “refreshing willingness to depart from convention. Bringing in outsiders such as the highly regarded Nemat Shafik from the International Monetary Fund – young, female and internationally minded – may help him to entrench the changes he clearly wishes to make.”
None of the fundamentally disruptive and anti-capitalist forces emanating from elastic money and central banking, and so glaringly exposed in the recent crisis, will be lessened by pretending the central bank is just another company and thus a natural part of the market economy. Introducing new management techniques and adopting the fads of business consultants, from ‘avoiding group-think’ to ‘embracing diversity’, will not render the central bank any less interventionist and the next crisis any less inevitable.