Debts of doubt
On the eve of his departure from the European Central Bank, Lorenzo Bini Smaghi is delivering a welcome reminder of what the modus operandi of such an institution should be: pragmatism in a little bit of mystery. The only thing that counts, Bini Smaghi says in an interview with the Financial Times, is the mandate – price stability. But the central bank can, and should, keep an open mind about the means it uses to accomplish its mission.
Bini Smaghi seems at ease with the ECB’s current official mandate, which some economists have criticised as being too exclusively focused on inflation-fighting. But he also calls for doing away with “quasi religious discussions” that have sprung up about quantitative easing in the euro zone. In other words, money printing shouldn’t be a taboo and might be necessary when or if deflation threatens, and once interest rates are at the point where they can’t be lowered any further. But neither of these pre-conditions have been met for now. This position is as far from German-style extreme hawkishness as it is from the let’s-print-money policy that some are urging the ECB to adopt.
Bini Smaghi insists that the actions of central banks should be characterised by “constructive ambiguity”. This may be the most important point of his parting message. Markets and media too often seem to consider central bank transparency as a fundamental right. But no central banker in his or her right mind should surrender the power that comes with uncertainty – or even secrecy. It should keep the market guessing about timing and the scale of actions. From time to time predictability may be necessary. Yet constant ambiguity is what allows a central bank to be effective.