Friday, May 16, 2008

Piketty Interview

In Le Monde.

Central Banking

Lately there seems to be a certain amount of turmoil around the question of what central bankers have done and ought to be doing. Even before the subprime crisis there was no real consensus, even though there was a tendency to credit what has been called "the Great Moderation"--the lessening of the severity and frequency of recessions--to central bank vigilance and success not only in quelling inflation but in shaping inflationary expectations. But in recent days we have had Joseph Stiglitz launching a broadside on "inflation targeting," one of the tools used by some central banks to achieve these goals, and now another heavyweight economist, Alan Blinder, along with collaborators, raising questions about central bank communications strategies, following Michael Woodford, who asks similar questions. And this is to say nothing about the vociferous criticism of central bank actions in connection with the subprime crisis, with many critics alleging that lack of oversight encouraged risky behavior and that bailouts have only exacerbated moral hazard in financial markets.

What is the relevance of all this to French politics? It's no secret that Sarkozy has been unhappy with the European Central Bank. Central bankers, who like to think of themselves as virtuous vestal virgins, may have secretly delighted in the fact that their most outspoken critic seemed to go out of his way to publicize the character flaws that are supposed to afflict pandering political sinners: he spent lavishly both in public (cutting taxes on wealth as well as on overtime) and in private (yachts, jets, bling). The ECB, being a relatively young institution, has struggled mightily to establish its "credible commitment" to combating inflation, letting the chips (unemployment, slow growth) fall where they may. Like stern disciplinarians everywhere, they have insisted that the punishment is for the profligate child's own good. But the articles cited above are perhaps a sign that the "spare the rod and spoil the child" mentality of central bankers may be about to change. The new parenting style has yet to find its Dr. Spock. The critique of the puritanical martinet is still couched mainly in the language of mild internal dissent rather than outright apostasy (with the possible exception of Stiglitz). But internal dissent, coupled with more vociferous extramural denunciation and real changes in global markets (when food and oil are in short supply, is "inflation always and everywhere a monetary phenomenon"?), signal impending changes in central bank practice, on which political actors will want to capitalize.