The flipside of Coyne

James Coyne, who was Governor of the Bank of Canada from 1955 to 1961, passed away earlier this month in Winnipeg at the venerable age of 102.  Coyne is best remembered for a territorial dispute with the government of John G. Diefenbaker and his Finance Minister, Donald Fleming, a dispute that has passed into history as the "Coyne affair".  The Chief wanted the Bank to do more to stimulate the flagging Canadian economy; the Governor refused.  Coyne then voted himself a big pension increase (!), at which point an enraged government passed a law declaring the position of Bank governor vacant (!!).

Coyne resigned the next day, but in effect won the battle for Bank autonomy, as his chosen successor, Louis Rasminsky, refused to take up the post until he was assured he would be free from government interference.  Coyne, then, can be seen as a standard-bearer for the breed of aloof and untouchable central bank head that became commonplace by the end of the last century.  Recall that it was only in 1997, with the election of the Blair government, that the Bank of England finally achieved full operational independence.

In fact, Coyne was even more of a fore-runner of the modern central banker than the bare bones story above would suggest.  Although the common recollection is that he quit over the principle of Bank independence, his disputes with the government of the day were much more wide-ranging.  Dief and Fleming were anxious to use loose fiscal policy to boost the economy.  Coyne opposed this, and did not hesitate to make his views public, thereby straying well beyond the established limits of his responsibility.

Forty years after the Coyne affair, it had become commonplace for central bank heads to pontificate about anything and everything.  None took advantage of the bully pulpit more actively than Fed Chairman Alan Greenspan.  The Maestro was vehemently opposed to what he perceived as lax fiscal policy during the Clinton years, yet did a remarkable swerve to offer full public support for major tax cuts when the Bush Jr. administration came to office.  Without Greenspan's intervention those tax cuts, which paved the way for the dire fiscal mess the US finds itself in today, might never have been enacted.

The noughties, then, were the apotheosis of the independent central banker, from Washington to Frankfurt to London.  How do you think that went?  It's not hard to make the case that, in sitting by and watching as the greatest asset bubble in history formed, the central bankers suffered one of the most remarkable collective failures, either of intellect or of will, in modern times.  So, it should be said, did the politicians, analysts and economists who mostly acted as cheerleaders even as the excesses reached absurd proportions; but it's the central bankers, who are tasked with preventing this kind of nonsense, who must take most of the blame.  

We live in world where a sports coach can get fired if his team loses two games in a row, but remarkably, no such fate has befallen the central bankers.  Ben Bernanke at the Fed? Still in post.  Mervyn King at the Bank of England?  Ditto.  Jean Claude Trichet at the ECB?  Moved smoothly into a comfortable retirement at the end of his assigned term. Having wrought the crisis, the same gang has been given the job of fixing it.

There isn't even much discussion of altering the powers of the central banks, aside from some extremist mutterings in the US, where there is always an audience for Fed-bashing.  (Hi there, Ron Paul!)  Indeed, both the Bank of England and the ECB are in the process of gaining additional powers.  A number of years ago, the former UK Chancellor, Ken Clarke, would occasionally muse out loud about how things were better when UK politicians could push the BoE around a bit.  There's very little sympathy for that view these days, even though it's hard to see how even the most feckless of politicians could have arranged things much worse that the "professionals" at the central banks did in the half-decade or so before the financial crisis.

It seems evident that the complexity and inter-dependence of financial markets has made central banking an almost impossible job.  The professionals at the banks have to run hard to keep up with the pace of innovation, while the politicians, having rid themselves of responsibility for this crucial but treacherous area of  public policy, have no desire to get back in the firing line.  It's hard to imagine that this is what James Coyne envisaged when he squared off with John Diefenbaker, but he's part of the long history that has brought us to where we are today.