Confusion reigns

by
Peter Radford
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from Peter Radford

What on earth were they doing?

Rocked but undaunted by the great financial crisis the orthodoxy of our central banks survived to fight another day.  The system had been saved.  That no one saw the onrushing crisis is still being debated.  Of course some people saw it coming.  Anyone with a scintilla of understanding of Minsky for instance.  But those folk are hard to find in the top seats of central banks.

The objective of the so-called independent central bank is to preserve the system.  To make it safe for markets to continue undisturbed by the intrusions of political whims.  To save, that is, capitalism from the depraved intrusions of democracy.  The idea is to separate as firmly as possible the political and the economic realms.  After all as economists seem to believe: people are astonishingly rational when they participate as market members, but are hopelessly self-indulgent and irrational when they participate as voters.  We all suffer from split personalities in economic orthodoxy.  Rational one minute, mindlessly mixed up the next.  It’s an interesting view of human behavior.  It undergirds, in rather more formal guise, orthodoxy and its resolute defense of central bank independence.

This independence is supposed to maintain a wall between these two halves of our personalities.  Making the system safe for markets means guarding vigilantly against the inevitable weaknesses of politicians who might fall victim to the democratic urge to look after the majority of voters. That would be awful.  Inflation would surely surge as money flooded throughout the corrupted economic machinery.  That surge would be inevitable.  Politicians are notorious for acting on incentives.  Like getting re-elected.  That makes them very bad custodians of an economy which must always follow a sober and self-denying path.  Sobriety and self-denial are, as we all know, the hallmarks of solid market activity.  Markets, thus unencumbered by political mischief, can go about their perfect work allocating resources in the most efficient manner possible and distributing the consequent rewards according to the blindingly objective rules that economists have identified as the natural doings of market processes.

So what just happened?  What on earth were they doing?

Central banks the world over, with very few exceptions, have clearly forgotten or buried that sober and self-denying impulse.

They’ve been monetizing the debt.

How horrid.

And not just on a small or limited scale.  They’ve been going all in.  They’re not supposed to do this.  Not at all.

The objective of this heterodox outburst was to save the system.  That’s the same objective, you will note, that previously drove them to deny monetization of debt at all costs.  So what was once apostasy is now good faith.  And what was good faith is apostasy.  It’s hard to keep up.

Does this mean that all those years of relentless near puritanical denial and mean-spirited policy were incorrect?  In a related vein does this mean that unemployment was not always and everywhere voluntary?  Where did this great flip-flop come from?

Was orthodoxy wrong?  Or was it just a special case to be tossed overboard when the system really needed saving and manifestly couldn’t save itself? We have been told for decades that printing money for politically motivated reasons such as bolstering social programs is destabilizing and flat out wrong.  Only a fool would advocate printing tons of money and flooding it into the economy.  As for monitoring the debt: well, that’s beyond the pale.

Until.

Until it isn’t.

So let me get this right.

Printing money for political reasons is just bad.  Printing money to save the system is wonderful.

The ease with which orthodoxy has been bent in order to save the system seems to indicate a certain — how do I say this delicately? — lack of principle.  Surely printing money is printing money.  Monetizing debt is monetizing debt.  In the wonderful world of economics the ends surely don’t justify the means.  I thought economies behaved according to smoothly unfolding laws.  Are the central banks telling us that those laws are simply contextual?  Or, worse, ideologically constructed?

Surely not!

Perhaps, more likely, all economics is contextual.  Circumstances drive what is appropriate.  There are multiple orthodoxies depending on the state of play, history, and the urgencies of the moment.  By and large the central banks have done a decent job steering their respectivpe economies through the disruption of the pandemic.  What they have done is to upend what they held as true previously.  They have demonstrated the relativity of economics.

Now the danger is passing, a great debate is under way: will the central banks revert to what they did before?  Or will they, having broken the old orthodoxy in order to save the system, develop some new orthodoxy?  Old habits die hard.  I think the smart money will be on a convenient forgetting of the efficacy of what was just done.  The banks will revert.  It’s the safe thing to do.

Which raises one last question:  which was out of step with which?  Was it the old orthodoxy that had been made obsolete by developments in the system?  Or was it that the system never really conformed to what the old orthodoxy described?  Had economics stopped being a study of economic activity and become, instead, a design or blueprint for it?  I think the latter.  Having become part of the technocratic milieu of the late twentieth century economics was no longer a study of something.  It was a prescription for something.  The trouble being that the description of capitalism that justified the subsequent prescriptions was not the capitalism found in the real world.  So orthodoxy was always out of step with reality.  It’s just that there was insufficient disruption to show the disjuncture clearly enough.

Now we know.

And so do the central banks.  No wonder confusion reigns.