Central bankers are unelected officials but they have always had an outsized impact on economies and the welfare of citizens. After the Great Recession, they have gained even more power and influence as they brought the global financial system back from the brink. Paul Tucker, former deputy governor for the Bank of England who had a front seat as the financial crisis unfolded, said central banks have emerged as a “third great pillar of unelected power alongside the military and the judiciary.”
His book, Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, examines the enhanced role of central bankers and offers principles for them to follow to be good stewards. Tucker, who is also chair of The Systemic Risk Council, joined the Knowledge at Wharton show on SiriusXM, to share his insights.
An edited transcript of the conversation follows.
Knowledge at Wharton: Considering the title of the book, should central bankers be elected officials?
Paul Tucker: No, it would be the wrong solution. But your question gets to the underlying problem. When we were born, the big decisions were taken by the people that we elected. Now, too many of the really big decisions are taken by judges or central bankers or regulators. We need to be careful about how we design these institutions, and we need to keep them to a narrow role.
Knowledge at Wharton: What are the most important things we need to consider when looking at central banks?
Tucker: I think slightly different problems come up in different jurisdictions. I’ll give an example from the United States and an example from Europe. In the U.S., the Federal Reserve and its congressional overseers need to get to a place where the Fed isn’t suspected, fairly or unfairly, of lending to institutions that are fundamentally unsound, which is bailing them out. That’s the job of politics, not the job of technocrats. It doesn’t matter whether they did do that, they’re perceived by some people on both the right and the left to have done so. They need to shed that perception and shift their policies and the way they explain their policies so that people feel more comfortable with them.
Knowledge at Wharton: How can central bankers help to better educate the public on what they do? Did the global financial crisis give us a better understanding of their role?
Tucker: Former chair Ben Bernanke going on [CBS news show] 60 Minutes was like talking directly to the American people. I thought that was a good initiative. Actually, I think the Fed chairs should go on television a little bit more. I don’t think they should compete with politicians, but they should try and explain what they do in as straightforward a language as they can muster.
“Our societies are now much more reliant on unelected power than on elected people, and this has had consequences.”
The European Central Bank has ended up being the guarantor of the whole economic system, yet they can never solve the underlying foundational problems. That, too, is an instance where the Central Bank has ended up being super powerful, yet it can’t deliver prosperity. It can only deliver stability.
Knowledge at Wharton: How is the Bank of England dealing with Brexit?
Tucker: Reflecting the results of a referendum in which the citizen of the U.K. voted, they need to stick to their basic job, which I think is what they’re doing: keep the economy going. Keep inflation in line with their target of 2%. Keep the banking system stable. That’s gotten more difficult because they don’t know what the deal is going to be. They don’t know what the terms of trade with Europe or the rest of the world are going to be. But they can’t solve that. They need to be responding to what hits them. They can’t be active players in what is a political, even constitutional, debate between the U.K. and continental Europe, and highly, highly charged in domestic British politics.
Knowledge at Wharton: What are the key functions of a central bank? Is it relatively the same in every nation?
Tucker: Yes. In a sense, the idea is simple: You put at arms’ length from the politics of both the executive and the legislative branches the task of maintaining the value of money in people’s pockets and in their bank accounts. This has to do with keeping inflation reasonably low and reasonably stable, and keeping the banking system safe and sound so that the money in bank accounts is going to be worth what people think it’s going to be worth.
That doesn’t mean that individual banks can’t fail, but that the whole system shouldn’t collapse, which of course is exactly what happened in 2007. I think it happened because central bankers — and I was one for a long time — had done a pretty good job at keeping inflation low, but they hadn’t paid enough attention to the resilience of the banking system. But that mission is now accepted again across the world. What’s changed is the politicians are much less involved in the broad swath of economic policy than they were a few generations ago.
Knowledge at Wharton: How specifically has that changed? Let’s use the United States as an example.
Tucker: What is the face that you associate with the United States finding its way out of the Great Depression? President Roosevelt. Whether people liked what he did or didn’t like what he did, that’s the face you associate with it. We’re 10 years after the crisis. There are lots of articles and conferences on 10 years after, and who are the faces? Fed Chairman Ben Bernanke, Treasury Secretary Hank Paulson, Treasury Secretary Tim Geithner. It’s a massive change in only a few generations that we’ve gone from President Roosevelt being the face to a bunch of unelected people being the face of crisis management, rather than President George W. Bush or President Obama. That’s not a point about those men individually. Our societies are now much more reliant on unelected power than on elected people, and this has had consequences.
Knowledge at Wharton: Are we better off now?
Tucker: If I compare it again with the 1930s, I think the Fed was much faster out of its blocks this time in 2008 than its predecessors were in the 1930s. That’s true in Britain, and I think that’s true in continental Europe. It’s part of why we didn’t revisit the horrors of the Great Depression.
“We need to allow individual banks to fail but not the whole system to collapse.”
But what didn’t happen after a few years is big action by government. I’m one of those who thinks that the U.S. government could have come in with some fiscal actions around improving infrastructure across the American continent. I think that would have been good for the productive efficiency and capacity of the economy. It would also have meant that the Fed interest rate could have been a bit higher. There have been costs to what the Fed has done. It has fueled exuberance and a bit of a boom in financial markets. While it’s helped the economy as a whole, it’s hurt … people who rely on income from savings. I do not think this is the Fed’s fault. The Fed or the European Central Bank in Europe, they’ve ended up filling a vacuum left by politicians. As citizens, we shouldn’t be comfortable that the political actors didn’t act.
Knowledge at Wharton: How has the scrutiny of central bankers continued post-crisis?
Tucker: I think this is part of a trend. I’m sure you remember a book by journalist Bob Woodward called Maestro about Fed Chairman Alan Greenspan. The title of that book should make us all cringe. These are meant to be unelected people doing the job given to them by Congress. There should be no question of maestro. You get this slightly politicized scrutiny and debate when people [realize], “These people are in charge,” and no one in the Federal Reserve wants that. But it depends a bit on the design of the institution by Congress, and then Congress being prepared to be the cavalry when necessary.
Knowledge at Wharton: When Yellen was chair, there were many news stories about President Trump questioning the path of the Federal Reserve. What was your reaction to that?
Tucker: In every country with an independent central bank, occasionally politicians make comments about what the central bank should do. You just have to shrug them off in the sense that you’ve been given a job by Congress, or in my case by the British Parliament. They’ve made you independent of politics. They can take that power away. But so long as the power given to you by the sovereign parliament exists, you can’t heed day-to-day commentary from the president or the finance minister or whatever. You just have to shrug that off. I’m sure that’s how central bankers around the world feel about it.
Knowledge at Wharton: You talk in the book about a money credit system and what central banks and institutions can do. What does that mean?
Tucker: The most extraordinary thing about our monetary system is that most of the money all of us have isn’t the money that’s issued by the central bank — it’s monies created by private-sector banks. These private-sector banks are useful because they take decisions about who can borrow away from the state and make it part of commerce. But these banks are fragile. We need to be clearer that central banks have a responsibility, and Congress has a responsibility, for thinking about how we want this mixed money credit system to work.
“A lot of the changes … made in the immediate aftermath of the crisis were good changes.”
We need to allow individual banks to fail, but not the whole system to collapse, as has happened maybe twice in the 20th century. I don’t think we’ve really paid enough attention to what freedoms should banks have, what constraints should be put on banks, and what constraints and obligations should be put on the Federal Reserve.
Knowledge at Wharton: Do we expect to see some loosening for banks in this administration?
Tucker: I’ll say two things about that. First, loosening the reins around the community banks, which is part of what Congress has recently done, strikes many people as a sensible thing. Loosening the constraints on the big banks, that’s not a sensible thing to do. The United States isn’t suffering from a lack of credit or lending.
A lot of the changes that the international community made in the immediate aftermath of the crisis were good changes. But it’s no bad thing after 10 years for people to think, were the right things done? What I think is a mistake is to think that there was over-shooting on every front. On some fronts there was over-shooting, hence rolling back on community banks. But on some fronts, probably not enough was done. The United States still faces a problem in that you’ve got lots of things that are not legally banks, they could get into trouble in just the same way as banks, yet they’re not able to borrow from the Federal Reserve against good collateral. And people haven’t been brave enough to take on the lobbies.
There’s a problem that if you get something that is a new activity that is very like banking that legally isn’t a bank, and initially it’s quite small so you don’t feel you need to respond to it, by the time it’s big enough that actually it matters to the stability of the financial system, they’ve also developed lobbying power. I’ve seen that again and again. I think it’s particularly a problem in the United States.
Knowledge at Wharton: I wanted to ask you about the dynamics between the Federal Reserve and other central banks around the world. How different is the structure here, whether the Fed itself or the Federal Open Market Committee (FOMC), in comparison to other countries?
Tucker: I’m going to make what sounds like a kind of tiny point, but I think it matters a bit. The Federal Open Market Committee, which decides interest rates in the United States, it’s quite a big committee with 12 voters at any one time and five or six or more talking. That’s too many people to have a proper discussion. I’ve ended up thinking that they kind of negotiate with each other via speeches. This is one of the things the U.K. has got right. The committee is nine. It’s one person, one vote.
I think they truly deliberate and change their minds individually in the meeting as they listen to their colleagues. Certainly, I did a couple of times. In continental Europe, it’s even bigger. Whereas I think the United States may have a problem in that respect, I’m pretty sure the continental Europeans do.
“They’ve done a good job at the ECB, but the underlying foundations are weak.”
I want to now tilt the other way that a great strength of the FOMC is the regional representation. This is not an institution that is just from Washington. It’s based around the country. I wish that the leaders in Washington got around the United States a bit more so that the people saw the leaders a bit more. I wonder whether the new leadership there won’t do that. Chair Jerome Powell and the vice chair strike me as trying to speak in relatively straightforward language that the American people can tune into rather than having to read a newspaper to make sense of it.
Knowledge at Wharton: How important is it to have an understanding of the differences in regional market conditions when setting policy?
Tucker: I had a big experience of that kind when I was making monetary policy in the U.K. In the early 2000s, we were moving towards raising interest rates. One of my colleagues, Mervyn King, who was the governor of the Bank of England, had been out around the country talking to people. They were saying, “Lots of people have been turning up from Poland and elsewhere. We’ve got more capacity in this economy than we thought.” And that wasn’t showing up in the data. The anecdote was that the feedback from business around different parts of the U.K. was more accurate than the data. And if that’s true in the U.K., which is much smaller than the size of the United States, that network of intelligence that the Fed has around the enormous landmass of the United States is hugely important.
Knowledge at Wharton: Does that make it more difficult to have unification of something like the European Union, especially from a financial perspective? What role will … the European Central Bank have in the years to come?
Tucker: They’ve done a good job at the ECB, but the underlying foundations are weak. Let me give you an example. Someone sets up a business in Massachusetts. All of their customers, suppliers and employees are in Massachusetts, but all of their equity holders are in California. Then maybe there’s a downturn in the Massachusetts economy, and this firm is a big one and it fails. The downturn is bigger because of the failure of this firm, but some of the risk is borne by California because of the equity market. Most transfers of risk across the economy of the United States are done by the equity market, not the fiscal authority. But when they’re really terrible, then the truth is that there are federal support systems for employees who’ve lost their jobs around the whole country.
In the euro area, there isn’t an equity market that is cross-continental in the same way. Perhaps even more important, there isn’t this catastrophic federal insurance safety net in extremities. That’s what President Macron in France is trying to promote. In a sense, they’re trying to do the equivalent of what was done by the Founding Fathers [in the U.S.] in slow motion because they’re not doing it in the 18th century, they’re doing it in the 21st century.