Has a central bank ever admitted making a mistake? Not very often, as far as I can tell. Maybe some minor missteps have been owned up to, but the big calamities are never acknowledged, at least not until most of the culprits are either dead or too old to care.
It took many decades of research, scholarship and the simple passage of time before there was a major admission of guilt about the 1930s: recently retired Federal Reserve chairman Ben Bernanke apologised, in 2002, on behalf of those of his long dead colleagues who had caused one or two problems in the dim and distant past: "Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
The “you” in that statement is a reference to Milton Friedman and Anna Schwarz, whose monumental study of US monetary history finally convinced economists that it was a series of grievous policy errors, made mostly by the Fed, that caused the catastrophe of the 1930s.
If you rarely own up to your mistakes you will probably not learn from them. We usually make our public institutions formally accountable to somebody, in the hope that some degree of oversight will minimise the risk of errors in the first place and encourage learning when the odd mistake happens. That’s the theory anyway.
It strikes me that central banks that have only token oversight, little accountability and display wilful refusal to admit mistakes are not fit for purpose. Not much scrutiny has been given to the repeated attempts by the European Central Bank to raise interest rates while the financial crisis was still raging. Nobody has any real power to quiz Mario Draghi about the current abject failure to meet the euro zone's inflation target. If the euro zone slips into outright deflation, with all of its attendant horrors, who has the power and authority to call the ECB to account in a meaningful way?
There is, of course, another mistake that our friends in Frankfurt are not prepared to acknowledge: the bank bond holders that they refused to let us burn. We now know that the IMF was opposed to the ECB policy of "no bond-holder left behind" and that the Bundesbank was also on our side. That's a pretty convincing case for the prosecution. But where is the accountability? Having made a clear mistake, one whose monetary consequences are measurable (in one sense at least), where is the victim supposed to go to for redress? How do we get our money back?
We hear about hopes for retrospective bank recapitalisation in response to all of this. This looks unlikely, but even if it happened it still lets the ECB off the hook.
Andrew Haldane of the Bank of England is that rare beast, a fascinating central banker. William Davies of Warwick University, in a wide-ranging interview with Haldane - more a conversation really - made the following point: "when the history of this crisis is written, one thing that I think will be focused on is how central banks have gone from being places with a limited, quite technical sphere of responsibility, to being key political public players, without having been designed for that purpose."
Haldane’s response to this spot-on observation was equally interesting: “... looking ahead, central banks .... are going to need to listen as often as they speak, to explain themselves as clearly as they’re able (warts and all), to say when they’ve got it wrong, to admit to mistakes when they’ve been made.”
The Holy Grail of central banking, credibility, depends mostly on hitting pre-set targets. But credibility also requires honesty. And I think it is legitimate to ask whether or not the ECB has been honest with us. It clearly made a mistake when it came to the bond holders. It may well have been an error of judgement, made in the heat of battle when things were less clear than they are now. But it was a mistake. Serious people said so at the time.
For its own sake, the ECB should come clean about all of this. If it is to become the kind of institution that commands the respect it needs, honesty about mistakes is, as Haldane has persuasively argued, essential. The ECB should fess up and figure out a neat way of giving us some debt relief. It’s the right thing to do and would enhance the ECB’s standing.
