The world's oldest central banks are almost – but not quite – as old as modern commerce. Of course it depends how one defines "modern". The ancient city of Babylon was a great trading center, as were Phoenecia and Carthage after that. The Bank of England was set up in 1694, not to act as supervisor / regulator of the country's banks but to help the sovereign raise funds to conduct war against the French. The Swedish central bank (the Riksbank) was the world's first, set up in 1668. But back in those days it too didn't do what it does now. In the 17th century it acted more like a private bank, in other words a credit institution.
How times change! Today central banks are also, almost invariably, regulatory institutions that supervise the country's banks. A more modern vogue is that of conducting monetary policy. These are two quite separate things, and in the U.K. in 1997 the government split the functions, only for the government in 2010 to merge them back again.
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Today we can add another function, which is also quite separate – that of underwriting the private sector. Of course that role isn't on any mission statement or set of objectives. It comes under things like quantitative easing (QE), and keeping interest rates at zero for years and years, and buying multi-billion dollars of credit-risky assets and placing them on the public sector balance sheet. One can almost call it a sub-set of monetary policy.
Except it isn't. How many of us have asked recently what the capital base of the "Big 3" central banks is? I mean, if a conventional bank buys a risk-bearing asset, it has to have an adequate capital base of liabilities against those assets. The Fed has a huge QE program, the European Central Bank has underwritten the entire euro zone's sovereign debt. Could they stand large-scale losses? But why bother with this technicality if they are state-owned bodies? Precisely my point.
The BoE governor recently noted that the U.K.'s recovery was "neither balanced nor sustainable". That is actually debatable; one can point to recent statistics in areas such as private sector consumption, GDP growth, wage levels, business investment, unemployment, and so on, and argue against this view. But that's a separate issue.
I'm wondering when it became the role of the central bank to ensure a balanced and stable growth cycle in the economy. Wasn't that originally the role of the private sector? Do we now have to wait until everyone is 100 percent convinced that growth is real and balanced and sustainable before the central bank can do anything so aggressive as raise interest rates by 25 basis points? And in the meantime provide all these blanket guarantees to the private sector, be they banks, sovereign authorities or the stock market?
So why might this be something to question? In the first instance, because it seems to have been arrived at by the back door. The "Greenspan Put" has been put forward, convincingly I suggest, as one of the causal factors of the 2007-08 crash. Shouldn't we ask ourselves, now that the potential abyss of 2009 is past, whether it is something that should be maintained? And secondly, stock market highs and economic recovery built on long-term central bank support – how real is that?
Because if the answer is "not very", that's something to worry about.
Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking(John Wiley & Sons 2012).