From Brexit to Trump, the great populist upset sweeping across the West has been well documented. And while politicians will undoubtedly continue to be the main victims of public discontent, it is the technocrats who actually run the global economy who will soon be next.
Economists generally have taken a beating since the financial crisis, but it will be central bankers specifically who are next in the firing line, with the first shots already zipping past their heads.
Bank of England Governor Mark Carney provoked a fierce backlash from Brexiteers after his comments during the EU referendum, while Donald Trump attacked the Federal Reservefor keeping interest rates low during his campaign. Dutch and German lawmakers have similarly accused the European Central Bank for harming their countries’ pensioners with low rates.
After the wave of reforms securing their independence in the early Noughties, Western central banks now face unprecedented political pressure, which over time will come to erode their freedom.
This is not to say there are not legitimate concerns over some of their decision-making. In Britain, years of cheap credit have enabled millions to become saddled with unsustainable mortgage debt, while also keeping thousands of zombie firms alive, partly explaining our woeful productivity. The value of UK savings has also been eaten away, leaving many with an uncertain future. Looking globally, quantitative easing (QE) – using electronically created money to buy up government bonds and other assets – and ultra-low interest rates have been accused by investors of creating new asset bubbles.
But forcing central banks to end QE and sharply raise rates, as Trump and others have suggested, would be a crude way to limit risky lending and protect hard-hit savers. And you only have to look at places like Venezuela and Zimbabwe to see the dangers of politicians meddling in monetary policy.
As Carney has argued, governments should – instead of getting too involved in the machinations of central banks – be using fiscal policy levers to ameliorate the knock-on effects of monetary loosening. But in today’s febrile atmosphere, where the advice of experts is rejected, it is hard to see anyone listening to him.
With only a few weapons left in their armoury, Western central bankers will be even more exposed during the next downturn, when they will no doubt face a fresh assault from their critics. But before venturing further into unorthodox monetary policy, such as negative interest rates, central banks would do well to look at what is happening in the tech world for guidance.
Big data – using computer power to crunch vast amounts of information – is already well established in industries like retail, but combined with advances in artificial intelligence (AI) could be a real boon for policy-makers. The Monetary Authority of Singapore set up a big data unit this year, while some of the best-performing hedge funds are using AI to drive their investment decisions.
A more radical proposition would be to rethink the very role of central banks, without handing power back over to politicians. The blockchain technology behind Bitcoin might be interesting central bankers, but the rise of virtual currencies generally could fundamentally transform what they do, or perhaps eliminate the need for them entirely.
Few at the beginning of 2016 would have predicted European integration and the trans-Atlantic alliance – the two main pillars of the post-World War Two order – would be as imperilled as they are today. The collapse of central banks could prove just as big a shock.