Central Bankers Need to Think Before They Speak

Central bankers have accumulated too much power. Often depicted, with some accuracy, as saviors for their ability to move quickly with force to alleviate economic and financial crises, a bit more consultation and deliberation wouldn't hurt. There are limits to such authority and really tough questions are often asked far too late.

That is one underlying and largely overlooked message of a recent review into the Reserve Bank of Australia, which could be instructive for other monetary authorities. The evaluation's more compelling points address the ability of top officials to rapidly deploy their arsenal of words and deeds to minimize the chances of dire outcomes. And how far out on a limb they should go in the name of heading off disastrous outcomes without being given a please-explain note. (Much initial attention focused on the independent panel's recommendations — endorsed by the government — to create a new interest-rate setting panel, meet less often and hold media conferences after every meeting.)

Having spent decades following central bankers, reading their speeches and parsing seemingly offhand remarks for deeper significance, the RBA examination boiled down to a disturbing and unspoken provocation. Should the most celebrated line in 21st century economics — Mario Draghi's pledge at a London event to do “whatever it takes” to save the euro — have been allowed to happen? The European Central Bank president did consult widely before his remarks about doing something big, though not with any great specificity. Attendees at the investment conference in July 2012 weren’t expecting anything profound that day, though a sovereign debt crisis had been buffeting Europe for several years. Draghi’s remarks are seen as a signal event in the region’s modern history. Great firepower would be brought to bear to save the over-arching project of post-war European integration, of which the single currency was the most potent symbol.

If the three person panel scrutinizing the RBA had its way, it’s contestable whether any Antipodean Draghi could have been so definitive in the moment, despite the subsequent lionization of the former ECB chief.