Central banks, who needs ’em?

The Swedish Riksbank just published a volume on Rethinking the Central Bank Mandate. The Riksbank, the world’s first central bank, is now working to engage the public in a thoroughgoing examination of what central banks should be doing today and in the future. We could use a similarly thoughtful discussion here in the U.S., but it seems unlikely to happen in the current political environment.

My piece in the volume reviews and critiques conventional thinking about why societies need independent central banks. Here is a teaser:

History makes clear that central banks exist because modern financial economies are prone to catastrophic pathologies: unsustainable fiscal policies that give rise to sovereign debt and/or inflation crises, private sector financial crises, and crises emanating from external imbalances. This paper will review the essential role that central banks have historically played in society’s quest to find remedies for these pathologies.

We have especially good reason to review this history as we reconsider central bank mandates. The early 21st century will, I suspect, stand out as a tragic aberration in the long history of thinking about central banking. It was a period when many experts, pundits, and policymakers either forgot most of financial history or declared its lessons passé. In the bold new view, the central bank’s overriding objective was to “provide a nominal anchor”; the myriad other issues that consumed most of monetary history came a distant second. History has a way of reminding those who forget, and in this case it did so with breathtaking speed and ferocity in the form of a classic financial crisis, the economic and political ramifications of which reverberate to this day.