Do central bankers have too much power? On this episode of the Capitalisn’t podcast, Paul Tucker, a former official at the Bank of England during the 2008 financial crisis and author of the new book Unelected Power, explains to hosts Kate Waldock and Luigi Zingaleshow technocratic hubris can imperil democracy.
Kate: So, Paul, why are you trying to impose constraints on yourself?
Paul Tucker: I believe in democracy. It’s a precious—
Luigi: This makes him even more unique, a central banker who believes in democracy.
Kate: Hi, I’m Kate Waldock from Georgetown University.
Luigi: And I’m Luigi Zingales at the University of Chicago.
Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.
Luigi: And most importantly, what isn’t.
Kate: Should I introduce Paul?
Paul Tucker: Only use the Sir once, but only once. Okay?
Luigi: Sir Paul.
Paul Tucker: Yes. Luigi carries this off with the appropriate derision that a European knows how to deliver.
Kate: Okay, I had a plan for the Sir. Ahem, today we’re joined by Sir Paul Tucker, an economist who is the former deputy governor of the Bank of England from 2009 to 2013. He’s now a fellow at Harvard’s Kennedy School and Harvard’s Center for European Studies. He’s also the first knight I have ever spoken to, which has me swooning. He has a new book, Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State. So, welcome to the show, Paul.
Paul Tucker: Well, thank you very much for having me here.
Luigi: Paul is unique in many dimensions, but I think one I want to share with my listeners: generally retired, important figures like Paul write memoir books that are pretty boring. They sell very well. They make them rich, but they’re pretty boring, and they tell the gossip of what was going on when they were in power. Paul has written a book which is exactly the opposite of this; it is a scholarly book where he reflects about the role of central banks today. He’s the only central banker who would like to limit the power of central banks.
Kate: So, Sir Paul, what prompted you to write this book in the first place?
Paul Tucker: Two things, and they came together. The first was, I was intimately involved, and that’s understatement probably, in designing the powers that were granted to the Bank of England after the financial crisis. It became a much more powerful institution. But actually, we leant against, I leant against some powers that some people wanted to give us. We argued for careful constraints around the new powers that we were given: supervisory powers, regulatory powers, all sorts of things.
In the back of our mind was a desire not to be too powerful, to be legitimate. I wanted an opportunity to write down what lay behind that, which was things like the values of democracy, and the rule of law, and constitutionalism. Not the kind of things that feature in discussions about central banking, but I absolutely promise were in my mind, and I think in Mervyn King’s mind, the then governor, as we navigated all of that.
The second thing was the kind of … This came to me really while I was writing the book, I started writing the book in 2014, is the debate about technocracy versus populism. I just ended up believing that technocracy needed to retreat a bit, both for its own sake, and, actually, because there was a risk of people saying, “Well, too much, too much is in these unelected hands.”
The book in some senses is about central banking, because central bankers are so powerful today. I was lucky enough, privileged enough to have some of those powers. But it is also, I don’t think of it as a book that’s about economic policy. I think of it as a book that is about democracy, and power, and populism. But not one of the books that attacks populism, or attacks technocracy. But it’s about technocracy from the inside, and where would one technocrat take technocracy? Well, shrink it a bit.
Luigi: In your book, Unelected Power, you make some very interesting remarks and comparisons with the judiciary and the military. One of my favorite lines issued by Clemenceau, who was prime minister in France during World War I, is that, “War is too serious a matter to let generals run it.” Can you say the same thing about central banks?
Paul Tucker: Not quite, but I think that’s exactly the right way of thinking about it. I should’ve used that quote in the book. The reason you can’t … it’s not just that you can’t leave war to generals, the generals can turn on you. Finding a place for the military in our societies was a huge thing for centuries, because they are capable of taking over. They have in some countries. One of the great achievements of our societies is avoiding that.
Where this matters for central bankers is when you get absolutely to the edge of their powers, but they could still save the world. They could still make things better. But you haven’t provided for it in law. Or if it is provided for in law, no one ever remotely contemplated it. Let me give you an example. The European Central Bank saved the euro area in 2012, and it acted within its legal powers. The constitutional court later determined that. But it certainly acted in a way that no one ever had thought it could.
I think they did consult the German government. I think they should’ve gone to the Council of Ministers, which is essentially the governing body of the EU—in intergovernmental mode, there’s an important constitutional nuance there—and said, “Do you want us to rescue your project, your country, your jurisdiction,” rather than just assume it? That may sound like a formal thing, but it amounts to … it’s consistent with our values that the unelected people should not take over. I certainly … you can’t have central banks going beyond their legal boundaries. If they reach their legal boundaries, then it’s over to the legislature. It’s over to the fiscal people.
That might sometimes … when I say this in this country, sometimes people will say to me, “But then the people would’ve been worse off. Of course, the Fed should always come to the rescue, and they’re going to get criticized.” I understand that sentiment. But there’s a trade-off between welfare today, and whether people accept the system of government. This is a judgment. The judgment about what to do when you’re at the boundaries, those judgments must be made by elected people, not by unelected people.
Luigi: The mood today is exactly in the opposite direction. You certainly belong to the group of people called experts. There is an increasing tendency of experts to say, “You should let us do our job, because you people don’t understand what you’re doing.” Certainly, a lot of people don’t understand what central banks and bankers do. “You people don’t understand what we’re doing, so we need to operate without the constraint of you politicians who don’t understand what we’re doing.”
Paul Tucker: I mean, what you say is true, but it’s not the whole truth. There are other people that say, “Well, we’ve had enough of being ruled over by people that we didn’t vote for, and can’t vote out.” We live, around the western world, in complex times. I absolutely don’t just mean since the presidential election here, or the referendum in the UK, and the various elections in continental Europe.
Part of the reason people are … Let me put it this way. The more and more we put into the hands of so-called technocratic experts, the more we take a risk that there will be a backlash. So, I deliberately put it just through the voice of the technocracy itself. Part of my message would be, the technocracy needs to retreat a bit, if only out of self-interest.
Now, I actually think there’s a deeper principled reason for retreating as well, but if only out of self-interest, technocracy ought to back off a bit, and not claim that it has the answer to every set of questions, because it doesn’t.
Kate: All right, so I’m pretty sure … I’m 100 percent positive that I am the lowest common denominator amongst the three of us when it comes to knowledge of what central banks do. So, I’m going to start out with my impression of what the Fed does. Okay? It’s as follows. It sets monetary policy. By that I mean it adjusts interest rates so that if, say, employment is low, and prices are low, or inflation is low, then the Fed will cut interest rates, so that it’s less attractive to save, people will go out and spend more, and that will boost the economy, therefore raising employment.
The opposite may also be true. If there’s high inflation and also high employment, the Fed may raise interest rates, and people will therefore cut back on their spending, and hopefully bring inflation down. Is that a fair characterization of monetary policy?
Paul Tucker: Yes, but it’s quite a few steps down the road of what a central bank is. A central bank is an institution of the state of government that issues money. It’s a special kind of money. It’s the money that we pay our taxes with, ultimately. It is the money that people are obliged to accept in settlement of payment for the goods and services that we buy, consume, et cetera.
This is an extraordinary thing. The state creates this money, and it says, “We will give this money a special legal underpinning.” If you and I … if I bought something from you, you and I would settle, not in that money probably, certainly if it was a large amount. We would settle. There’d be a transfer from a deposit, my deposit account with a commercial bank, to a deposit account with your commercial bank. But those banks would settle amongst themselves in the money of the Federal Reserve. Once you’ve created this money, you have to decide how much of it to have out there in the economy, or what price to put on it. That’s where what you say comes in.
Luigi: But Paul, you said correctly that most of us do not transact with that money. We transact with deposits. Why in the 21st century, and there are, of course, a lot of reasons in the 18th and 19th century, but why in the 21st century do we actually let banks be in control of the creation of most of the money? Today when I deposit my money in the bank, I get zero percent. When my bank deposits at the Fed, it gets an interest. Why do they have access to an interest and I don’t?
Paul Tucker: I think this is a great question. I think there is a good answer. Imagine that we all, all the population, had accounts with the Federal Reserve in this country, with the Bank of England in the UK, with the European Central Bank in continental Europe. We would hold balances with it. I want to suggest that if that was the case, that as well as being depositors with the central bank, when times got hard we would expect to be able to borrow from the central bank as well. We would want an overdraft account from the central bank.
It seems to me the most important thing in political sense that commercial banking does, is it gets the state out of determining the allocation of credit, who gets loans, and who doesn’t. Now it may well be with the new technology that there will be a way of solving for us all being able to hold money issued by the Federal Reserve, without having accounts at the Federal Reserve, which could be used to borrow from the Federal Reserve. But I would be very nervous about what started off as a monetary initiative ending up as a credit initiative. There’s a long history in this country, by the way, of people wanting to change the monetary system, and then when politicians get a hold of it, actually turning it into a policy about credit and lending.
Luigi: Why not use prices to allocate a given quantity? I think that if the deposits are safely at the Fed, and … you can then decide on where to invest them based on prices.
Paul Tucker: This is a model which is trying to separate the monetary system from the capital markets essentially.
Paul Tucker: No, no. That might work eventually. But so long as you find small businesses, or people who can’t access the capital markets, which is how things have been through the 20th and first part of the 21st century, then you will have some kind of banking-type institution, public or private, I prefer private, that makes loans to them. I think if we all have accounts with the Federal Reserve, the next stage, it
wouldn’t happen in the first week … over the years, as decades passed, people would say, “Well, actually, the Federal Reserve should get into lending to parts of the economy as well.” Be careful what you wish for.
Kate: All right, so in addition to what we’ve been talking about, the Fed also has other roles, though. Right? I mean, we’ve mentioned private banking. The Fed monitors, and, to some extent, does have control over private banks.
Paul Tucker: What I think central banks should be doing is ensuring the resilience of the biggest banks. Resilience comes in two forms, actually. For small or medium-sized banks, if they fail, the deposit insurer pays out to the insured depositors, regular people. That’s fine. I don’t think anyone should be in the business of trying to ensure that small or medium-sized banks are so safe that they never fail.
Now, actually, everybody made the mistake of hoping that the biggest banks would never fail. That, of course, wasn’t true. They did fail, so we can’t rely, even for the biggest banks, on supervision, the Federal Reserve, people in Europe, doing this so well, and the banks being so well managed that they will never fail. That failure will happen again. We need to ensure that that can happen in a more or less orderly way, so that the politicians aren’t faced with a stark choice between fiscal bailout of the banks, and the bankers, and the bondholders, and the equity holders in the banks on the one hand, or, on the other hand, complete chaos.