Friday, July 31, 2015

The Rhetoric of Post-Recession Central Bank Regulation.

In their respective recession assessment speeches in May 2013, Ben Bernanke and Mark Carney conceded that the presumed ‘the end of monetary policy history,’ a focus on macroeconomic stability above all else, contributed to the financial instability that caused the Great Recession.[i] Employment, output, the exchange rate, credit and assert prices were, for example, considered only in relation to this bearing and filled under ‘constrained discretion.’ The downside was that generally legislators, policy-makers, and central bank technocrats failed to link liquid capital flows and financial imbalances in many advanced economies.[ii]
 
In attempting to stabilise the post-Recession economy the US and Canadian central banks focused on monitoring and evaluation exercises with regulatory policy and practices to detect the financial vulnerabilities that exist in deeply connected and systematically important financial systems, and to further understand how shadow banking, asset markets, and the non-financial sector contributed to the collapse. Bernanke and Carney agree that better research and hypothetical stress tests can lead to more appropriate understandings of what the reserve bank should these kinds of circumstances arise again. While they work within and according to legislative frameworks such as the toothless Dodd-Frank Act, which are statuary designed to fail.[iii]Perhaps for this reason, Carney observes that “Globally, central banks are now being simultaneously accused of being ineffective and too powerful.”Accordingly, their concern is whether monetary policy and central banks are, or should, accountable to citizens more generally.[iv] They both suggest the need for a reconceptualization of the practice of the reserve banks.
 
Given the technical complexity of these issues, it is little wonder that Dean Barker can admonish that “the public and even experienced progressive political figures are not well informed about the key policies responsible for this upward redistribution, even though they are not exactly secrets.”[v] Still, the ameliorative, preventative, predictive, and re-conceptual approaches outlined above are unlikely be effective without a broader understanding of capitalism itself and the institutions that support its reproduction.

This is not so much irrational exuberance as structural entrenchment.
 



[i] The ‘end of monetary policy history’ was a commitment was to price stability above all else using inflation targeting at around 2 percent to lower market volatility. This was accomplished using an operationally politically insulated central bank using one instrument (the short term interest rate,) for one objective (controlling inflation via a consumer price index,) over a medium term (six to eight quarters,) using assert prices to detect emerging financial imbalances thereby minimising excessive fluctuations. Transparent communications was deemed importance around the uses and rationale of that instrument as a way to smooth out micro-fluctuations.

[ii] Recall that initially, the 2008 crisis was downplayed, and treated as a limited event, with explanations and analysis concentrating on micro factors such as rogue financial actors, shadow banking enterprises, or the nature of markets themselves. Carney writes that
“Echoes of the Great Depression motivated a swift and aggressive response. Major central banks provided hundreds of billions of dollars in extraordinary liquidity through a combination of repo facilities, standing facilities, securities lending and reciprocal swap agreements.”
These measure sought “to provide the stimulus to support activity and price stability. The links between price and financial stability were increasingly evident.” The collapse necessitated that
“In the fall of 2008, in response to the rapidly deteriorating conditions in global financial markets, a weakening U.S. economy, and an abrupt drop in commodity prices, G-10 central banks, including the Bank of Canada, conducted an exceptional, coordinated interest rate cut of 50 basis points.”

This highlights how interconnected the system is, the need for coordinated action, the more away from inflation targeting to financial stability, and the possible expanded role of central banks. Now central bankers have been self-appointed to play a supervisory role, “it conceptualizes and carries out both its regulatory and supervisory role and its responsibility to foster stability.” Carney describes this as “complete the contract” with a public at large
Carrney, M. (2013) Monetary Policy After the Fall, Eric J. Hanson Memorial Lecture University of Alberta Edmonton, Alberta, 1 May 2013

[iii] For instance, the United States Government Accountability Office suggests that Financial Stability Oversight Council mission is “inherently challenging.” This is because
Although the Dodd-Frank Act created FSOC to provide for a more comprehensive view of threats to U.S. financial stability, it left most of the fragmented and complex arrangement of independent Federal and State regulators that existed prior to the Dodd-Frank Act in place and generally preserved their statutory responsibilities. As a result, FSOC’s effectiveness hinges to a large extent on collaboration among its many members, almost all of whom come from state and federal agencies with their own specific statutory missions.
See United States Government Accountability Office, (2012) Finacial Stability: Report to Congressional Requesters, GOA-12-886, September 2012, p8
[iv] Bernanke, B. S., (2013) Monitoring the Financial System, Speech at the 49th Annual Conference on Bank Structure and Competition sponsored by the Federal Reserve Bank of Chicago, Chicago, Illinois, May 10, 2013 and Carrney, M. (2013) Monetary Policy After the Fall, Eric J. Hanson Memorial Lecture University of Alberta Edmonton, Alberta, 1 May 2013
[v] Barker, D., (2011) The End of Loser Liberalism, Washington, Center for Economic and Policy Research, p 1