Posted by: Dirk | May 11, 2012

Central bank independence – is China a role model?

A recent article in the FT written by a Chinese former central banker got me thinking:

In reality, China’s close co-operation with economic agencies is a stronger defence against local governments, equity investors and property developers – all of whom push for easy money policies – than a pure independence model. The MPC consists of officials not only from the central bank, but also from the finance ministry, and the banking, securities and insurance regulatory agencies.

The independence issue is critical in today’s world. The famous ‘Greenspan put‘ more or less meant that banks could always unload “stressed assets” at the central bank. That, of course, meant that banks could not lose by piling up debt on debt in order to buy more assets. If asset prices rise, it is their private gain. If they fall, it is the central bank that takes over those losses and the bank can exit without a loss. That system was exploited by Wall Street and the financial sector in general.

Central banking is not only about fighting inflation. It is also about not letting the investors get a free lunch.

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