Bill Cara: Finance Ministers vs. Central Bank Governors
April 15, 2008 – 7:06 pmIn commenting the G7/FSF-report, Bill Cara makes an exemplified critique in the tradition of the American Populist movement:
The G-7 meetings are ‘potentially’ the most important in the world. This is the gathering of Finance/Treasury Ministers and Central Bankers of historically the seven most economically powerful nations.
There is a big gap, however, between potential and reality when it comes to fixing the problems in financial systems. Central bankers will not permit it.
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With people who run the Bank of Italy, the Bank of Canada and the US Treasury today having close ties to Goldman Sachs, there is not a snowball’s chance in Bahamas that the endemic conflict of interest issue in financial services, which is the heart and soul of the problem, will ever be addressed.
So the pabulum fed to the public from the G-7 is an insult to our intelligence. Unless and until these most powerful governments take control of their treasuries from central bankers, their capital markets will continue to sink into an abyss where bankers will suck dry the wealth and the dreams of the People until they rebel.
Unfortunately, he does not go more into the argument of the diverging interests between Central Bankers and Finance Ministers. Finance Ministers in the history of the G7 have always tried to bring the Central Banks at the same table, and with the Financial Stability Forum even the regulators sit at that table.
There are two explanations for that:
- Finance Ministers don’t understand the often technical questions related to financial regulation.
- Finance Ministers don’t want to be involved in the sometimes uncomfortable dealings of monetary policy and need ’scapegoats’ to blame for unpopular decisions like deflation.
The truth, as always, is in the middle. Most finance ministers know quite well the technical and legal details of financial regulation, although there are exceptions. Nevertheless, supervisory agencies and central banks often have a more direct access to markets than the political bodies, thus they are more informed and maybe more sensitive to what is happening in the markets. That is why the Bank for International Settlements as Bank for Central Banks still plays such an important role in the Financial Architecture .
Good financial regulation needs to have an ear at the market, otherwise it will be ignored by market participants. The conflict of interest is not really between finance ministers and central bankers, but between good intentions and bad outcomes.
Bill Cara has a point though, as Central Banks are often more inclined to listen to large commercial banks than to other participants in the markets. Would the US Fed bail out a monoline insurer? Maybe not, but certainly an investment bank.
In addition to that, it is quite convenient for Finance Ministers not to be responsible for Monetary Policy or Financial Regulation. It allows some rather uncomfortable decisions to be made by “neutral” bodies.
Topics of this post: banks, bis, central banks, Discussions, finance ministers, financial regulation, g7