Central banker morality
The banking industry is nothing other than a simple leverage scheme that borrows money far in excess of its base capital and turns around and re-lends it at a positive spread. Common sense and the facts of history tell us it’s an extremely high risk venture which couldn’t possibly exist without overwhelming government support. Banking is essentially a government managed operation – the government insures bank deposits, regulates and tightly examines all aspects of operations, and most importantly through its central banks, provides unlimited cash when bank leverage schemes face inevitable difficulties. That this highly subsidized industry channels massive financial rewards to the well placed would seem to be a great “moral hazard”.
Otmar Issing is a German economist and former member of both the Executive Board of the European Central Bank and its German predecessor the Bundesbank. Unsurprisingly, he’s currently an advisor for Goldman Sachs. In the Financial Times today, he warns of great moral hazards in an article entitled “Moral Hazard will result from ECB Bond Buying”. The immorality that Issing sees has nothing to do with the great profits going to government subsidized leverage schemes; he focuses instead on far more dangerous sins. He doesn’t object to society, through the ECB, acting as lender of last resort to “private” leverage operations; his ire is directed solely at the thought of society creating its own purchasing power through the ECB purchase of government bonds.
Issing asks a fundamental question about societal debt and is forced to admit its ultimate monetary nature. This is dangerous territory as the entire myth of a global debt crisis collapses when the gaze shifts from horrible debt burdens requiring unending austerity to far more benign issues of monetary policy.
Should a central bank act as the ultimate buyer of public debt? (One should not disguise it under the term of lender of last resort)….Bringing this issue into the domain of the central bank means transferring an obligation of public finance into a monetary phenomenon.
His question can be rephrased down these lines: Should society create sufficient purchasing power to assure widespread prosperity if private wealth holders are unable or unwilling to do so? This question is far beyond the competence of a central banker, a mere regulator of leverage schemes, to answer; it’s a fundamental issue of democracy and prosperity. But of course he nevertheless answers his question in true banker fashion: “All the arguments in favour of such a “solution” of the public debt problem imply that the central bank will be taken hostage by politics…”. As if his preferred policies of tight money weren’t the height of politics. The issue isn’t whether monetary policy would be taken hostage by politics, it’s which politics will rule.
Issing considers the democratization of purchasing power to be not only a moral hazard but a terrible sickness, a pathology: “Stressing the role of the central bank as the ultimate buyer of public debt should be seen as an indication of the pathological state of public finances not as a sign of strength.” We must identify this view for what it is: not technocratic neutral economics but deeply undemocratic politics of the sort that’s existed since the dawn of human civilization. He continues: “(T)he prohibition of monetary financing is an indispensable element for a stable currency. Pressing the ECB into the role of ultimate buyer of public debt of individual member states would create the biggest conceivable moral hazard.” Is it conceivable that excessive monetary creation could lead to currency instability? Of course. But when Europe is experiencing massive unemployment and ever declining living standards, it’s absurd to think reasonable levels of monetary creation would be excessively risky.
Central banker morality is one of the main pathologies in the world as it’s a prime barrier to widespread prosperity. That Issing’s views are widely accepted as moral is itself a moral hazard. In his universe, morality has nothing to do with human well being, full employment, or economic security. It’s nothing but the old tired aristocratic demand for tight and undemocratic control over society through the domination of money. Our standard of living is far too important to leave in the hands of bank leverage schemes and central bankers.