Starting a new job is always a rather nerve-wracking experience. But spare a thought for Janet Yellen: not only does the incoming head of the Federal Reserve assume the mantle of the ‘most powerful woman in the world’, with all the extra—often sexist—scrutiny that brings, but she also inherits responsibility for one of the biggest economic experiments the world has ever seen.
Remarkably enough, there is still no consensus on whether the actions of her predecessor, Ben Bernanke, were instrumental in containing the greatest economic crisis since the Great Depression, or have simply postponed the inevitable day of reckoning by creating yet more debt and new asset bubbles. What we can say with confidence is that central bankers everywhere enjoy a power and significance that belies their invariably cautious language and conservative appearance.
The rise of central bankers is a reminder that in the modern world power is increasingly a function of position and that, especially in democracies, it is conferred by a wider framework of political processes and relationships. One of the reasons central bankers such as Yellen and Australia’s own Glenn Stevens have become so influential is because policymakers have enabled them to become so.
One of the key – albeit generally unspoken ideas – underpinning central bank independence is that some issues are far too important and technically challenging to be left to politicians who may not have the requisite expertise, and who cannot be trusted not to put short-term electoral advantage ahead of the ‘national interest’. One way of reassuring international financial markets and credit ratings agencies about national economic integrity, it seems, is to hand responsibility for monetary policy to an unelected technocrat.
The big question that emerged from the recent global financial crisis is whether the relationship between financial markets and central bankers has become dysfunctional, even dangerous. While few people in the world have a better technical understanding of the nature and history of financial crises, it is striking that the efforts of America’s chief central banker have primarily been about bailing out Wall Street rather than Main Street. They still are. Much of the US$2 trillion that the Federal Reserve pumped into the economy by buying government debt has helped to prop up the financial sector and fuelled the recent rise in global stock markets.
Although the US is not as dominant as it once was, for now it remains the world’s largest economy and its notionally domestic policies have major international consequences. Much of the money that was created through quantitative easing has ended up in emerging markets. ‘Tapering’, or gradually winding back the credit creation process, threatens to destabilise emerging market economies with large current account deficits. Given that the ranks of such countries include the likes of India, South Africa and Turkey, these actions have potential geopolitical consequences, too.
Whatever the merits of the expansion and subsequent contraction of the money supply in the US, one thing is clear: its effects are felt well beyond America’s borders. Weaknesses in other economies may be brutally exposed by American policy; Turkey’s reliance on continuing inflows of short-term capital to finance 80% of its current account deficit, for example, leaves them vulnerable to the same sort market gyrations that brought the Asian economies low in the late 1990s.
Although Janet Yellen has been appointed to head America’s central bank, her decisions consequently have global ramifications. Described as an interest rate ‘dove’, she will understandably be more concerned about unemployment in the US than geopolitics in Asia. The big question will be whether she can manage to address domestic concerns without roiling international markets and vulnerable economies elsewhere. In short, can she bring the world’s great economic experiment to a conclusion without precipitating yet another crisis?
More than Yellen’s reputation is at stake here. The standing of the entire economics profession, of which she is a prominent member, took a fearful battering as a consequence of its ability to account for, much less foresee the recent financial crisis. Public confidence in some of the most powerful and important institutions of contemporary governance was also undermined.
While it may have been politicians that came in for most of the criticism, they were often merely the public face of a wider failure of governance in which powerful, vested interests seemed to exert enormous influence while remaining entirely unaccountable for their actions. It is indicative of the continuing power of the financial sector that a keen student of economic history like Bernanke, who must have been acutely aware of the financial sector’s role in triggering both the Great Depression and the GFC, had to bail it out rather than rein it in.
It is noteworthy that the international club of central bankers – the Bank for International Settlements – recently backtracked on plans to regulate the financial sector’s reliance on debt in the face of intense industry lobbying. One of the most powerful expressions of nascent forms of much-needed global governance reflects the priorities of some the most powerful economic actors in the world.
Janet Yellen’s appointment is, therefore, a timely reminder of how the world works, where power lies, and just how difficult it is to manage an economic system that is both crisis-prone and remains susceptible to the influence of private and national interests, rather than public and international ones. Managing these cross-cutting interests and priorities, let alone the technical difficulties of winding back an unprecedented experiment in expansionary economic policy, will be a formidable challenge. Wish her luck.