On the dire state of central banking


While I am not a fan of Alan Greenspan, I recognize that the man is intelligent.

Since the Greenspan put, we have seen the financial markets tie a knot round the hands of central bankers and essentially lock up their policies, especially the Fed. Shall we call it ‘sentiment’?

In his October 1999 speech to the Financial Markets Conference, Greenspan puts forward a clear understanding of the role financial market play: credit flow, financial intermediation, risk diversity and sharing, innovation of products. These are necessary but should be contained within reasonable parameters and ratios.

What we have done in recent years is lost our way. That said, we should now remind ourselves what role financial markets play in our economic and social system. So let’s hear from the man himself, as Greenspan ‘puts’ it:

We must continually remind ourselves that a financial infrastructure is composed of a broad set of institutions whose functioning, like all else in a society, must be consistent with the underlying value system.

On the surface, financial infrastructure appears to be a strictly technical concern. It includes accounting standards that accurately portray the condition of the firm, legal systems that reliably provide for the protection of property and the enforcement of contracts, and bankruptcy provisions that lend assurance in advance as to how claims will be resolved in the inevitable result that some business decisions prove to be mistakes. Such an infrastructure promotes transparency within enterprises and allows corporate governance procedures that facilitate the trading of claims on businesses using standardized instruments rather than idiosyncratic bank loans. But the development of such institutions almost invariably is molded by the culture of a society.

Corporate governance that defines the distribution of power invariably reflects the most profoundly held societal views about the appropriate interaction of parties in business transactions. It is thus not a simple matter to append a capital markets infrastructure to an economy developed without it. Accordingly, instituting convergence across countries of domestic financial infrastructures or even of the components tied to international transactions is a very difficult task.

For all our sakes, let’s hope those in China have heard of the Grinch-looking central banker, as delegates from the Ministry of Finance, People’s Bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission, National Development and Reform Commission are congregating at the National People’s Congress. Perhaps they should question what their next moves will be, depending on what their motives could be.

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