Central Banks’ Role Will Greatly Diminish In The 21st Century

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If necessity is the mother of invention, let’s take a look at the “need” that gave rise to concept of the central bank, that mysterious, ivory tower bastion of presumed economic stability that seems to dictate many aspects of our everyday life.

The first central bank was the Bank Of England, and the need that created it in 1694 was a capital requirement for £1.2 million to help fund the Nine Years’ War with France.

Come to think of it, The US Federal Reserve performed a similar sleight of hand in 2008 at the onset of the so-called Great Financial Crisis, as well as throughout and beyond its duration: the famous, or infamous, Quantitative Easing was really nothing more than the temporary creation of additional money supply to shore up the faltering capital models of various banks.

The rest of the time, central banks carry on the self-appointed task of “guiding” national economies down a stable and relatively crisis-free path. This model may seem benign on the surface. But, when chaotic circumstances rear their ugly head at the most inopportune times, no model that claims sophistication in matters of economic stability can do much better than the pure dynamic forces of the free market.

There is one other aspect to central banks’ role these days, and that is to put forth rules and propose legislation to regulate and curb the darker, greedier tendencies of the free markets in general and overly-opportunistic banking interests in particular. This may be the only real non-invasive benefit of a central bank.

Central banks have been notorious for intervening in national economies when it appears as if the various possible outcomes of chaotic developments threaten to put their self-anointed duties as sole arbiters of the greater economic good at risk. The thinking goes something like this: A chaotic event causes the collapse of certain markets or asset classes, which in turn threatens to ruin individual businesses and even whole industries. The inevitable result is widespread and protracted unemployment which puts downward pressure on the economy and causes recession or even depression. Often, central bankers are blamed for not doing enough to stabilize the economy during these catastrophic shifts of supply and demand.

When chaotic circumstances rear their ugly head at the most inopportune times, no model that claims sophistication in matters of economic stability can do much better than the pure dynamic forces of the free market.

In present times, central bankers have taken it upon themselves to avoid being blamed and labeled as unfit supervisors of the economic good. After all, they’re not mind-readers. They can’t possibly be expected to engineer a stability framework that features a mechanism for every possible calamity, known or unknown, that might cause the economy to go awry.

This conclusion yields a new and very interesting question: If a central bank is merely capable of keeping the rich richer (as long as they don’t get too greedy), what or who remains to address the broader, more macro tasks of developing schemas that encourage socio-economic fairness and equality, real and tangible growth, and prosperity, charity, and compassion for all?

The only component available to do this well is a self-regulated private sector that is able to articulate its intentions through the supply-demand dynamics of robust and unimpinged free-markets.

For too long, fear has been the elephant hiding in plain sight in the halls of finance and policy. Fear leads to an unspoken, almost subliminal presumption of lack of confidence; we must continually be on the lookout for what can go wrong with the decisions we’ve made, and we must be at the ready to do, as ECB president Mario Draghi stated in 2012, “whatever it takes…”

This may sound reasonable at first, but if central bankers expend all their energy continually looking only for what can go wrong and exhausting their resources attempting to reign in rogue industrial interests to placate ideological and financial supporters and participants, there simply is no energy left to nurture and develop all the things an economy requires for a totalizing approach to wholistic and sustainable stability and growth.

If a central bank is merely capable of keeping the rich richer, what or who is left to address the broader, more macro tasks of developing schemas that encourage socio-economic fairness and equality, real and tangible growth, and prosperity, charity, and compassion for all?

Central banks’ role will greatly diminish in the 21st century. In today’s postmodern era of globalization and corporate self-actualization in areas such as community outreach, equality and parity of pay, benefits and employee housing, as well as the gradual migration to pro-distributive prosperity models, and a genuine attitude of self-regulation and moderation, alternative private sector banking and other capital frameworks in every sphere will begin to develop and emerge (actually, they’ve already begun!). These diverse yet cooperative and collaborative systems will be much more able to balance the risks and absorb the costs of guiding the economies of nations, thus relieving central banks from this inordinately heavy burden.

I can just see a regional Fed operative clamoring to make a rebuttal, “What you’ve described is what we already have!” That’s odd – I’ve not received any emails inviting me to the next FOMC meeting. And, I wouldn’t attend anyway. For, I have numerous fundamental disagreements with today’s banking system and central banks’ urges to somehow attempt to manipulate the factoral causalities of inflation. I’ll take my solution as a starting point and send out my invitations when the model is ready for prime time.

History is overflowing with cautionary tales of how well-intended systems grew to become so large and complex that they collapsed under the weight of their own enormity. The very same can be said about the concept of the central bank, and it is high time to put the reigns that guide global economic stability and growth in the hands of many, rather than the hands of a presumptuous few.