The moment of truth for the high priests of global central banks

Are central bankers just unfeeling robots still worshipping the false gods of counter-inflation?

BACK IN November 1996, Edward Luttwak, an American commentator, wrote a wonderful essay - a passionate, withering excoriation of central bankers. Pulling no punches, it compared the bankers with Aztec priests for their belief in human sacrifice in the ceaseless struggle against the - to their minds - Satanic enemy of inflation. He likened them to classic Freudian anal-retentives for doing what they loved to do most: "Tighten credit, restrict spending, hold back demand". And with the Pope for their belief in their own infallibility, and the length of their terms in office.

If there were a Pulitzer Prize for polemic, then Mr Luttwak undoubtedly would have deserved to win it for his diatribe, which was published in the London Review of Books. But as a piece of political or economic analysis, it seemed like a curiosity, strangely out of kilter with the times.

For one thing, the world was still worried about inflation then; for another, Mr Luttwak seemed to be beating his head against the brick wall of an unshakeable wisdom. Hey, hadn't we all, left and right, dried out now? Didn't we all accept that inflation was indeed the number one enemy? Wasn't the problem of modern economics how to manage relentless growth? And weren't central bankers, clearly independent of elected governments, just the guys to do the managing?

But then, that was a full two years ago. And if in a New York minute, as the Eagles' song has it, everything can change, two years in the life of the global economy is the equivalent of several Pleistocene, Ice, Stone, Iron and Bronze ages strung together. Two years on, this magnificent philippic against the fundamentalists of the "fanatical new religion" of "Central Bankism" seems strangely on the nail; the fears it presciently sought to arouse back in the good old days of 1996 are suddenly a lot more fashionable than they were then.

Indeed, that is precisely the reason why Eddie George, Governor of the Bank of England, has had so much sand kicked in his face for injudiciously suggesting to the Newcastle Journal - or if not suggesting, assenting to the suggestion - that unemployment in the North-east could be a price worth paying for curbing inflation in the South. Doesn't this prove precisely that central bankers are unfeeling robots, insulated from the real world, still worshipping the increasingly false gods of counter-inflation, just when the UK economy is about to go off the cliff?

Well, yes and no. Certainly, I find it hard to believe that Mr George was talking either loosely or off the record in his exchange with an experienced journalist. Mr George, everyone seems to accept, paused before his remark. Why pause, other than to consider what you are going to say next?

But that said, Mr George is not the perfect model among central bankers for Mr Luttwak's Aztec priest caricature, for several reasons. The first is that, whatever you think about his behaviour before the last election, and perhaps immediately after it, when there was a powerful case for raising rates earlier in order to bring them down sooner, Mr George has since largely been, on the Bank's Monetary Policy Committee, among those who showed some modest signs of worrying about deflation as well as about inflation. At least, in February and March, he used his casting vote on the committee to ensure that interest rates did not go up further than they already had.

Secondly, thanks to Ken Clarke and Gordon Brown, he presides over a body of men - and one woman - who enjoy vigorous and, as a result of publication of the minutes, open, debate, one now widely expected to lead to a cut in UK rates next month.

Finally, Eddie George was at least engaging with the outside world. He is summoned to appear before the Commons Treasury Select Committee from time to time; and it would be highly undesirable if his roasting this week stopped him from talking to journalists.

This isn't necessarily to defend the Bank's conduct of monetary policy over the past few months, nor to say that Mr George and several of his colleagues do not show vestiges of Aztec-priestery. It's just that they are by no means the worst of the breed. Which is where Mr Wim Duisenberg, President of the European Central Bank, comes in. The ECB, already informally driving a European monetary policy remarkably resistant to the mounting calls for lower interest rates, is the Central Bankers' Central Bank. It is full of bankers who have spent their lives mimicking the Bundesbank, and while it has the secrecy of that institution, it has nothing like the balance of political experience on its council that the Bundesbank has.

It may be too much to say, as Mr Luttwak did, that the initials ECB deserve, for reasons of secrecy and unaccountability, to "acquire all the resonance of KGB, or CIA not to add very indelicately, SS", but they stand for much of the priestly arrogance he was driving at. One European central banker, asked a year or two ago if his bank was independent of government, replied magnificently: "You are asking the wrong question. The right one is whether the government is independent of the Bank and the answer is no."

Mr Duisenberg gave extremely short shrift at the end of last month to Gordon Brown when he, apparently alone among European Finance Ministers, had the temerity to suggest that perhaps its deliberations could be a little more open, at least to European finance ministers, than it intends at present.

Yet the more power that devolves to the unelected central bankers of Europe, the more necessary it is that they should have at the least the minimum standards of accountability that apply to the Bank of England. No doubt many of the ECB's staff and members are clever men, but how can we tell? As Oskar Lafontaine, designate German finance minister, likes to remark of the Bundesbank's belief in its own fallibility, since several of its key figures are men known to him to have made mistakes before they joined, why shouldn't they have made any mistakes since?

It may not worry Mr Duisenberg much but those of us broadly in favour of British EMU entry should worry quite a lot about his capacity to become the villain of an EMU referendum in Britain.

At a time when distinguished economists are urging the US Fed - with a much better record than its European equivalents of being sensitive to the whole economy - to cut interest rates further than they have, this is also quite a pertinent question to ask about the European Bankers' theological resistance to rate cuts. There are now signs of mounting pressure in the Chancelleries of Europe. There has been a change of government in Germany; and when Mr Lafontaine calls for cuts in European rates he, unlike Mr Brown, has the authority of representing a country signed up to the euro.

The bankers will resist; but if they fail to respond, then there are already some calls, for example from Mario Monti, the EU single market commissioner, for a relaxation of the pact that is keeping European fiscal deficits down to prescribed levels. Something needs to give - if it doesn't, Mr Luttwak's critique of "Central Bankism" two years ago will look horribly apposite.