Wanted: Central Banker

A couple of weeks ago, the Economist magazine ran an unusual “help wanted” ad.  The Governor of the Bank of England, Sir Mervyn King, will retire in June and the British government is looking for a replacement.

On the one hand, it might seem like a great job.  The Governor receives a salary of £300,000, or about $480,000, per year.  Also, at 318 years of age, the Bank of England is steeped in tradition. On ceremonial occasions, the Bank’s guards wear pink morning coats with tails, red vests, and top hats.

On the other hand, the Governor’s every move will be scrutinized and nobody will ever say anything nice about his or her job performance.

Central bank governors wield enormous power, setting the course of monetary policy and, increasingly, taking the lead in banking regulation.  Many consider the Governor of the Bank of England to be the second most important person in the country (after the prime minister), much as many in the U.S. consider the chairman of the Federal Reserve to be the second most important job in the United States.

The fact that the British government is advertising for someone to lead the Bank of England speaks volumes about how the job of central banker has changed in recent years.

Before World War II, most central banks were private institutions.  Even though they were responsible for policy decisions that had important implications for government policy, central banks were often independent of the government.  A running joke at Britain’s Treasury before World War I was that when its top civil servant visited the Bank of England, he took a taxi, because he was not quite sure where the Bank was.

Although central bankers did not operate in complete secrecy, they nonetheless worked primarily behind the scenes.  This characteristic was personified by one of Sir Mervyn’s predecessors, Montagu Norman, who was governor of the Bank of England from 1920 to 1944—longer than anyone else in the Bank’s history.  Although Norman did make public appearances, he was something of a recluse, frequently traveling under assumed names and going to great lengths to avoid encounters with the press.

Today, central bankers are no longer anonymous.  Their every movement makes news.  Financial reporters used to guess the course of Fed policy based on the size of the briefcase Federal Reserve Chairman Alan Greenspan carried into meetings at which monetary policy was decided.  When Greenspan fainted on the evening of June 26, 1989 (the 63-year old had played tennis that afternoon in the intense Washington, D.C. heat), rumors that he had had a heart attack caused a brief panic on Japanese financial markets.

And every remark they make becomes fodder for speculators and the press.  Greenspan was famous for his Sphinx-like utterances during his testimony before Congress.  Dubbed “Fed-speak,” Greenspan’s discourses were deliberately opaque so that he would not make news, which might send shock waves through financial markets.   Nonetheless, his speeches, like those of his successor Ben Bernanke, are studied the way a fortuneteller might read tea leaves.

Modern central bank governors are less inclined to hide than Montagu Norman.  Mario Draghi, the president of the European Central Bank, regularly holds news conferences to explain ECB policy. In the U.S., Bernanke holds quarterly press conferences.  Pragmatics, as well as democracy, favor this approach.  Instead of having the press, public, and markets spend fruitless hours trying to guess what the central bank will do or interpret vague pronouncements, central banks now declare their intentions at the outset.  This gives more force to their intended policy actions and makes it less likely that their actions will be misunderstood

The higher public profile of central bankers comes at a cost, however.  They are now firmly in the limelight—and the cross hairs of politicians—whether they like it or not.

During his campaign for the Republican presidential nomination, Texas Governor Rick Perry said that any additional monetary easing on the part of Bernanke and the Federal Reserve would be “treasonous.”  The eventual Republican nominee, Governor Mitt Romney, has been only slightly kinder, making it clear that he would not reappoint Bernanke when the Fed Chairman’s term expires in 2014, without calling him a traitor.

The job of central bankers during the past few years has not been easy.  They have to guide monetary and regulatory policies during a period of fragile financial institutions and markets, weak labor markets, and sub-par economic growth.  And they have to do this in the glare of an increasingly partisan political environment.  Maybe it is not such a great job after all.

Of course, if you have not already applied for the Bank of England job, don’t bother.    Applications–submitted on-line, of course–closed on October 8.