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Why Politicians Need To Let Technocrats Do Their Job

Central Action

Why Politicians Need To Let Technocrats Do Their Job

 

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Since the result of the referendum whereby the UK population voted to depart from the EU, and during the US election cycle, the media has reported on a growing battle between politicians and technocrats. Mark Carney, the current Governor of the Bank of England, most recently came under fire by the Conservative Party for his relaxed monetary policy conditions.

He is not alone as his US counterpart, Janet Yellen, and the Federal Reserve as a whole have also been critiqued for their role played in response to the economic downturn of 2008. These criticisms have brought into question the ability of technocrats to effectively fulfil their mandates, which include targeting inflation, maintaining low levels of unemployment and promoting economic growth. Therefore, have the general populations of the US and the UK had enough of experts as was highlighted by Michael Gove in the build-up to the EU referendum?

Politicians And Control

Economist Alan Blinder states if politicians were given control over monetary policy long-term economic gains would be sacrificed for short-term gains. This would potentially increase the level of volatility in financial markets and generate greater economic uncertainty. Delegating monetary policy control to an institution such as a central bank removes the risk of partisan positions that can favour political parties or specific industries. By eliminating the central bank from political control credibility can be increased and there is the belief that the institution does not have the incentive to influence the money supply for political gains.

Although there are plenty of reasons to continue to support the Bank of England’s independence since 1997 or the Federal Reserve’s since 1913. The politicians that have been critical of these institutions do have a point when it comes to their expertise particularly in the build-up to or after crisis periods. This can include Alan Greenspan’s support for the Commodity Futures Modernisation Act of 2000 when he spoke of his desire to prevent the regulation of OTC derivatives such as credit default swaps. Evidently, these types of securities played a significant role in the downfall of organisations such as AIG.

The former Federal Reserve Chairman was also at fault for his meetings with the Greenlining Institute, a housing advocacy group, in 2004. Alan Greenspan was warned about deceptive practices at subprime mortgage lenders in the build-up to the financial crisis of 2008 but failed to act upon this information. During that time the Federal Reserve was one of the several parties seeking to maintain the economic boom that resulted after the implosion of the dot-com bubble.

Some Bad Decisions

Another inaction by the Federal Reserve, under the leadership of Ben Bernanke, was the decision to allow Lehman Brothers to fail, made in partnership with the US Treasury under Hank Paulson. The markets responded in a punishing manner when the Dow Jones dropped 504 points on September 15th, 2008. The decision ultimately had a snowball effect whereby speculators pounced on the financial health of rival financial services firms including Merrill Lynch, Morgan Stanley and Goldman Sachs by shorting their stock.

With regard to the Bank of England, the institution struggled with, for example, the collapse of Northern Rock, where the first run on a UK bank since 1866 occurred. Overall, the Bank of England did identify liquidity as a central concern according to meeting minutes in July 2007, but unfortunately it was too slow to react.

More recently, Mark Carney did provide a bleak forecast for the outcome of Brexit that has been challenged by the 0.5% UK economic growth rate during the third quarter of 2016. His recession forecast has been heavily criticised by advocates for the Leave campaign. However, the economic impact of Brexit is likely to be felt in the long-term.

Finally, as mentioned in previous articles, the current relaxed policy environment has witnessed the creation of a liquidity trap, whereby increases in the money supply are absorbed by an excess demand for liquidity. Therefore, cash is hoarded as opposed to being spent due to the perceived opportunity cost. In a small inflationary environment, cash becomes more attractive as a store of value for investors. Therefore, to minimise the impact of the liquidity trap, the demand for cash needs to decline. Alternative methods of economic expansion need to be explored through areas such as fiscal policy. However, with government debt to GDP levels at 104% and 89% for the US and the UK, respectively, there could be a reluctance to pursue significant programs by the Republican Party or the Conservatives.

Conclusion

Overall, politicians and technocrats do not possess perfect records, and their decisions have broad domestic and international impacts. However, in a time whereby there is increased uncertainty in countries like the UK, it would be best not to expose the pound and the economy to enhanced volatility through the removal of technocrats by political integration.

The same can be said for the US given the recent election of Donald Trump as President. The markets, as the global economy witnessed, have punished the UK for the uncertain economic outlook for the UK in the long-term. They will punish the US economy too if politicians seek to introduce self-inflicted volatility. In the battle for independence, and to maintain credibility, the central banks should continue to remain independent of political influence.

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