Sixteen years ago Ben Bernanke — then just a US Federal Reserve governor — waded into the slippery notion of central bank independence.
During a trip to Japan, he told his hosts that "in the face of inflation . . . the virtue of an independent central bank is its ability to say 'no' to the government".
But he then declared that the situation changes "with protracted deflation", which Japan was in the midst of, and "a more co-operative stance" by the central bank towards the government is needed.
"Greater co-operation for a time . . . [with] fiscal authorities is in no way inconsistent with the independence of the central bank", he advised.
It is worth pondering those words again in 2019 — but not just in Japan. During the past decade Bernanke has been a champion of western central bank independence. After all, when he served as Fed chair between 2006 and 2014, he evangelically defended the US central bank's independence.
Last month a "gang of four" former Fed chairs — Bernanke, Janet Yellen, Alan Greenspan and Paul Volcker — jointly declared that they are "united in the conviction that the Fed and its chair must be permitted to act independently".
This was sparked by the recent attacks that US president Donald Trump has unleashed against their successor Jerome Powell. (Latest sample: Trump now describes Powell and the other governors as "boneheads" for not cutting rates below zero.)
Yet there is rich irony here. Even as central bankers rush to declare their independence, a debate is under way in financial circles about the ideas that Bernanke raised in his 2003 speech. This does not mean that the Fed will automatically cave in to Trump's demands on interest rates.
That is because the issue at stake is not what attracts the president's ire — policy rates — but Bernanke's "greater co-operation" in other crucial policy areas.
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Investors need to watch this debate, particularly if the world starts heading back into a new recession.
To get a sense of this it is worth taking a look at a proposal put forward last week by Philipp Hildebrand, the former Swiss central bank governor who now works at BlackRock.
He points out, in unusually blunt terms, that central bank policy is now so exhausted — and impotent — in a world where US$17 trillion ($26.6t) in bonds now carry negative yields that "in the next recession, a different policy framework will be required".
In Hildebrand's view this will involve efforts to "put central bank money into the hands of public and private sector spenders rather than relying on the incentives of lower rates".
This kind of direct handout or fiscal support would "certainly require closer co-ordination between fiscal and monetary authorities", he suggests. Such a plan does not tally with total independence.
For another hint of the changing zeitgeist, note a memo released four months ago by Ray Dalio, founder of the Bridgewater hedge fund, entitled "It's Time To Look More Carefully At 'Monetary Policy 3' and 'Modern Monetary Theory'".
Dalio has built his career as a red-blooded capitalist and free-marketeer. But he also thinks that central banks have now exhausted classic monetary tools to such a degree that we will see a "continuum of co-ordinated monetary and fiscal policies" in the next downturn.
This might take the form of "helicopter money", central bank speak for handing out cash through public spending or a tax cut.
However, Dalio is also bracing himself for the potential adoption of MMT — a novel concept developed by (mostly) leftwing economists that calls for lavish government spending to boost demand and drive inflation to a preset target financed by a tame central bank that would be forced to keep rates at zero.
"We are heading for fiscal and monetary policy co-ordination that is of a form that we haven't seen before in our lifetimes," he warns.
This prediction should not shock historians. A prescient 2013 paper by the economists Paul McCulley and Zoltan Poszar noted that history shows that "fiscal dominance and central bank independence come in secular cycles" — and central banking independence is a fairly recent construct.
That will horrify some policymakers and investors, given that central bank independence has recently been a central pillar of financial stability.
As Dalio admits, it is unclear whether existing government structures will be able to deliver this co-operation smoothly, in a populist world, as easily as Bernanke suggested back in 2003. I double it. But perhaps Bernanke should update his paper — and offer some tangible advice.
Written by: Gillian Tett
© Financial Times