"You don't know what you're doing" is the soccer crowd's refrain to a failing team manager's player selections. Such an accusation applies to almost all the world's central bankers, whose carefully cultivated pretensions of deific prescience are now deflated.
Aside from attempting to address the economic mess they have created, central bankers are setting out their apologias. The authorised version is given by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia.
Plosser tells us that monetary policy can't do everything. He says it cannot protect against buffeting caused by non-monetary disturbances, such as a sharp rise in the price of oil or a sharp drop in the housing market.
In fact, soaring oil price increases over the past couple of years were absorbed without causing economic dislocation. As for house price increases, these were caused partly by governments forcing up the price of housing land (and in the US requiring relaxed lending standards) and partly by the reckless expansion in the money supply fomented by the Fed and, indeed, by our Reserve Bank.
Plosser adds. "Encouraging the belief that any system of financial regulation and supervision can prevent all types of financial instability would be a mistake. Instead, our goal should be to lower the probability of a financial crisis and the costs imposed from any troubled financial institution." Having specified such limited goals, neither Plosser nor other central bankers and Treasury chiefs have acknowledged their abject failure to meet them.
For the central bankers, their bail-out proposals are policy-on-the-run with no sense of fitting the colossal rescue sums they want into what is needed. The US $700 billion is inadequate to liquidate the "toxic debt" variously estimated at $3-6 trillion. It will be used to reward the very people who have acted recklessly in their borrowing and lending and it is being accompanied by a re-run of the very low interest rates that were the original cause of the debacle.
The central banks have been set up with dictatorial powers over the money supply and interest rates precisely so that these levers of a stable economy can be kept away from the political process. Wisely, the machinery of monetary management has been removed from the control of politicians who therefore have to be open in borrowing and stealing to buy votes.
But, in taking such powers from politicians, we have surrendered considerable discretion in monetary management to detached experts. These reserve bankers have basked in that power. They have encouraged an army of sycophants examining every word they utter looking for hidden meaning or some hint as to where the great minds' thoughts are developing.
In fact the Masters of the Policy Levers had no clue what the money supply was doing. The recession we now face is due solely to their monetary mismanagement. When a central bank presides over year after year of money supply increasing at double digit rates, something in their training and qualifications should be asking "where is all that money going"? The increased money supply can only be reflected in inflation, transfers overseas and real economic growth.
We are pretty certain that economic growth was at levels of only 3-5 per cent, so the rest must have been boosting inflation or was being accumulated by overseas borrowers. The overseas accumulation of Australian funds is certainly one direction where the monetary expansion went. The collapse of the $A is a vivid illustration that the lenders want their money back and, in claiming it, are causing just the sort of policy surprises and wild fluctuations that the monetary policy managers were supposed to prevent.
As for the rest of the surplus money created by the Reserve Bank, if it was not being measured in the CPI it must have gone into other forms of inflation. Housing is the obvious area. House prices were inflated by mismanagement in other arms of government, which boosted prices by creating land shortages and excessive taxation of new developments. This created a casino with prices escalating and home owners complacently took out second mortgages to finance rental properties and overseas trips.
In the current debacle, there have been calls for punishment of the merchant bank Masters of the Universe. But all they were doing was responding to the policy environment set by the central bankers, and it is they who should be called to account.
Far from acknowledging their culpability, central bankers and Treasury chiefs are calling for even greater powers. It would be foolish to agree to this.
Many voices are calling for greater regulation. Regulatory controls should be constantly reviewed, though in the current world crisis it is not always the lesser regulated countries that have fared worst. In Australia, Lindsay Tanner has recognised that there remain areas where red tape is excessive and costly. Knee-jerk regulatory intensifications and government interventions have not worked in the US and UK and can store up real future problems.