Postmodern Central Banking Logic

The European Central Bank: a work in progress in more ways than one.

I couldn't help but be struck by the logical progression of this New York Times Reuters report.


It goes something like this: 


1. The stagnating state of the recovery is finally becoming indisputably apparent. US manufacturing growth has ceased even as the Euro crisis seems likely to stretch on and on. 
2. The stock markets rally! Why?
3. Because equity markets seem to believe that the economy is getting so bad that even the hawkish European Central Bank will be forced to notice and expand the money supply. 


Money quote:

The key reason for the gains in equities is not so much hopes of a resolution of Europe’s problems, but that the crisis can be clearly seen to be depressing economic activity worldwide, raising the likelihood of central bank action.

This all adds up to a pretty paradoxical dynamic. We hope that the economy gets bad enough that a central bank feels compelled to act? Crazy stuff. 


I hope this crisis helps remind citizens worldwide that central banks play an extremely large role in economic policy, a role often larger than that of an executive or legislature (particularly given the political quagmire which characterizes the policy making roles of the more traditional branches). 


In the aftermath of the crisis, nations across the world will be forced, I think, to establish a more formal place for central banking in the democratic order. Central banks' problems regarding popular accountability are fairly obvious: a small band of policy makers can decide the fate of a nation with almost no direct input from voters. 


But like their closest institutional cousins, constitutional courts, central banks are isolated from the transient whims of voters by design. Like an independent judiciary, they are republican rather than democratic institutions. And just as nations like the United States have taken centuries to navigate a counter-majoritarian difficulty rooted in the judiciary, the world may take centuries to properly delineate the role of central banks. 


A good start might be making some basic understanding of monetary policy a central part of civics education. Citizens who don't major in economics should still be able to understand the basic drivers of the world and national economy. Right now, very few do. And the most conspicuous commentators on monetary policy have no idea what they're talking about. 


A readable, non-technical, lucid introduction to money would be a good start. The Divine Perspective will try to offer something like that (Money for Dummies?) in the coming weeks.