By Center for Market Education
The Center for Market Education (CME) recently held a webinar titled THE FUTURE OF CENTRAL BANKING, an event organized by CME in cooperation with Universiti Teknologi Mara (UiTM) – Sabah Campus, Asia-Pacific Students for Liberty and the Adam Smith Center (ASC) from Singapore. The recording is available here.
The webinar was moderated by Dr Bryan Cheang (founder of the ASC) and introduced by Dr Carmelo Ferlito (CEO of CME) and Dr Firdausi Suffian from UiTM. The main speaker, instead, was Dr Daniel J. Smith, Professor of Economics at the Jones College of Business at Middle Tennessee State University (USA). In the occasion, the book MONEY AND THE RULE OF LAW (authored by Peter J. Boettke, Alexander W. Salter and Daniel J. Smith, and published by Cambridge University Press) was launched.
“We are glad that we held this event now – explained Dr Carmelo Ferlito – a very peculiar moment for the Malaysian economy, in which incredibly expansive monetary policies and the following inflationary tendencies call for a reform of the role of our central bank”.
During the webinar, Professor Smith highlighted three major problems with the
contemporary way to do central banking, exacerbated by the actions taken during COVID-19:
1. Central Banks and the Moral Hazard of Corporate and Financial Bailouts: As unconventional intervention into the economy through a central bank becomes the conventional practice of monetary authorities, market participants begin to expect this regular intervention anytime there is a downturn. This creates a moral hazard problem that incentivizes large corporations and financial institutions to incur excessive risk.
2. Central Banks and the Moral Hazard of State and Local Bailouts: As state and local governments bailouts become an accepted central bank tool during a recession, we can expect the moral hazard problem to extend to state and local governments. State and local governments will have far less incentive to engage in responsible budgeting when it comes to their budgets, public pensions, rainy day funds, and other obligations if they can expect bailouts during a time of crisis.
3. Central Banks as Executors of Fiscal Policy: In the pressure to do something immediately in a recession, central banks are becoming the primary executors of fiscal policy during a recession. Central banks are increasingly expected to compromise their primary mission of monetary stability by making major interventions in the economy beyond providing general liquidity. These interventions necessitate preferential credit allocation, giving unelected central bankers substantial power to choose winners and losers in the market.
Professor Smith also suggested the directions which should be taken in reforming contemporary central banking:
1. Bind monetary authorities with an explicit rule. Hold them accountable and have enforcement mechanisms (including bonuses and even removal from office for meeting or failing to meet targets). A Nominal Gross Domestic Product (NGDP) targeting rule would be preferred over an inflation targeting rule.
2. Make property rights a fundamental right of citizens, not a pejorative of central bankers by protecting it along with other fundamental rights in a constitution.
3. Forbid the central bank from engaging in mission creep. Prohibit the adoption of additional formal or informal goals (such as critical race theory, the environment, inequality, international trade, etc.) The sole purpose of a central bank should be delivering stable and predictable money.
“The suggestions proposed during the webinar – concluded Dr Ferlito – need to be taken into account within the Malaysian context, where we experienced the wide and arbitrary role in fiscal policy played by the central bank. The risk we are facing without these reforms is to encounter, sooner than later, a malinvestment boom and bust crisis fueled by easy money, similar to the Great Recession experienced in the West in 2007-2008”.
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