Central banks in the post-crash era: a case of power without legitimacy
How much influence should central bankers wield in a democracy? That's the question Paul Tucker asks in 'Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State'. His answer is thoughtful and robust.
It also contains some uncomfortable conclusions for monetary authorities, which have emerged from the wreckage of the global financial crisis with enhanced powers.
Less clear is whether fractious politics, or the demands of keeping the world economy upright, will permit a fundamental rethink.
Over the past decade, central banking has confronted a paradox.
Although the US Federal Reserve, European Central Bank and others largely failed to see the crisis coming, they played a crucial role in cushioning the subsequent downturn. In doing so they have tested - and at times exceeded - the limits of what they were previously allowed to do.
Monetary policymakers' reward has been new powers. Some have been given - or, in the Bank of England's case, regained - responsibility for regulating banks. In most developed economies, central bankers are now explicitly charged with spotting and deflating asset bubbles.
Meanwhile, politicians have largely relied on ultra-low interest rates to gradually correct weak post-crisis growth.
Tucker believes this is an unsustainable state of affairs.
Central bankers are being sucked into deeply political decisions over how government is financed, and how income is distributed. Yet these "overmighty citizens" have no electoral legitimacy.
At the same time, frustrated voters in the West have turned to demagogues. As a result, central bank independence is under threat.
Tucker, who spent three decades at the Bank of England until he stepped down as deputy governor in 2013, had a close-up view of the crisis and aftermath.
Yet readers hoping for revelations about whether he knew some British banks were fiddling the London Inter-bank Offered Rate, or his relationship with former Governor Mervyn King, will scan the 568 pages in vain.
In its place is a deep and serious attempt to explore how democracies delegate authority to independent bodies.
That is not a new challenge. Governments have trusted independent judges and military generals for centuries. Utility regulators and central bankers were granted autonomy more recently.
Tucker explores the legal, economic and sociological arguments for handing over power, as well as how politicians retain oversight.
Tucker distills these ideas into a 'Money-Credit Constitution' for central banks. This includes a target for inflation; a requirement that lenders hold reserves; a promise to provide liquidity to sound banks; the power to wind down failing ones; and limits on the size of the central bank's balance sheet.
Whether Tucker will get a chance to put his ideas into practice remains to be seen.
Although passed over when the UK government picked a BoE governor in 2012, he is likely to be a contender when Mark Carney departs next year.
Whoever takes on the job will find this book a comprehensive and thoughtful guide to the limits of their unelected power. (Reuters)