Thread by @KellerZoe

The hero-worship of central bankers has become obscene: democracies must put them back in their box' | via @telegraph telegraph.co.uk/business/2019/…

The adulation of Mr Draghi as he leaves the ECB is unseemly: he made mistakes, leaves the €Z in a deflation-trap, and the ECB has become a political animal strayed a long way from democratic accountability. It is a shadow government. A sort of “Vatican City” answerable to no one

The Bank of England’s Sir Paul Tucker was too polite to name peers in his book, Unelected Power: The Quest For Legitimacy in Central Banking, but vaulting over-reach by Frankfurt is the sort of behaviour that he had in mind.

The Fed too has dangerous itches. Dudley, ex-chief of the NY branch, suggested the Fed should tighten monetary policy to force Trump from office: “Trump’s re-election presents a threat to the US and global economy”. That he utter such thoughts shows how unhinged his coterie is.

There is nothing new about rogue central bankers. The Fed did cause the Great Depression by shrinking the money supply (Friedman & Schwartz). Congress had to order it to reflate in 1932 by launching bond purchases.

I remember reading Secrets of the Temple: How the Federal Reserve Runs the Country as far back as the Eighties. William Greider argued even then that the Fed posed as great a danger to US democracy as a rogue CIA or FBI.

To my knowledge, Mr Draghi was not involved in the decision to topple Greece’s prime minister in 2010 – for calling a referendum on Greece’s EU-IMF Troika austerity package – and install the ECB’s vice-president as head of a junta. But he played part in every other dark episode.

As governor of Bank of Italy and ECB member he helped draft the secret “Trichet letter” to PM Berlusconi in 2011 demanding sweeping changes to the country’s labour laws. A second secret letter was sent to Spain’s PM demanding changes to the Spanish constitution no less.

The ECB was acting ultra vires. It had no legal authority to do this.
This was the ECB’s condition for agreeing to backstop the bond markets. Berlusconi dragged his feet and was overthrown by monetary means in a soft coup.

This is how one ECB governor described the methods to me: “They threaten govnts that misbehave with financial destruction. They cut off refinancing and threaten to kill the banking system. They create a roll-over crisis in the bond market. This is what happened to Italy in 2011.”

In the case of Greece. Draghi acted as the EU’s gendarme in bringing the rebel Syriza govt to heel. He tightened collateral rules on Greek debt pre-emptively in Feb 2015, shutting the country out of the ECB’s refinancing window.

He then dialled down (ELA) liquidity to private banks – arguably illegally – until the ATMs ran out of money and Syriza folded. This is what Paul Tucker was hinting out when he warned that central banks are acting as “overmighty citizens” on the outer boundaries of legitimacy.

although his point is broader. They have become the “third great pillar of unelected power” alongside the judiciary but without the same tradition of self-restraint.

Sir Paul Tucker said they have acquired “quasi-fiscal powers” that amount to a revolution in the system of government. They pick winners and losers. Their actions since 2008 have led to a vast transfer of wealth from the ordinary working stiff to the owners of assets.

hence the radical plans for confiscation by Elizabeth Warren in the US, the coming counter-revolution. Whenever central banks face calls for greater accountability, they huffily invoke the sanctity of institutional independence.

But have they actually made a good fist of monetary management over the past 30 years, since the cult of inflation-targeting took hold? The problem with targeting that single variable during a disinflationary supply shock – caused by globalisation and China’s entry into ...

the world trading system – is that it leads instead to asset bubbles. The original sin of the central bank fraternity in the Nineties was not to recognise the implications of this. This is the canonical critique of the Bank for International Settlements.

The central banks allowed the asset booms to run but each time intervened to prevent the necessary purge when recession came.
The BIS says the process became a “debt trap”. The further along, the harder it is to stop.

they have kept alive an army of “zombie companies” and depressed productivity. This stagnation keeps lowering the Wicksellian natural rate of interest. It is an inter-temporal black hole. “Low interest rates beget to low interest rates,” says the BIS.

Ah yes, but that is not Mario Draghi’s fault, and didn’t he save the euro?
No, he did not. Nor was he a magician. Mr Draghi followed a path already trodden by other central banks, and he was not always on top of the game.

Daniela Gabor, shadow banking expert at Bristol University, says he underestimated the monetary potency of the securities and repo markets in 2011-2012 and allowed conditions to tighten violently. This was a key reason why the EMU debt crisis metastasised.

Strictly speaking, it was Angela Merkel who “saved the euro” in the summer of 2012 and she did so because the Italian and Spanish bond markets were by then imploding.
At that point, she agreed to let the ECB act as lender-of-last resort as the path of least political resistance.

A fiscal bailout approved by the Bundestag would have been harder. Italy’s Mario Monti said the plan was approved in principle by the Eurogroup. The details were then co-ordinated with the German finance ministry.

Would it have been different if Jean-Claude Trichet had still been running the ECB? Of course not. It is time to puncture this corrosive myth of central bank saviours. They are civil servants. Our democracies should put them back in their boxes.