Trouble at the Fed (and Elsewhere)

As U.S. President Donald Trump starts asking about whether he can fire the Chairman of the Federal Reserve, it is time to start asking how strong the protections are for politically independent central banks.  The answers are alarming: Trump is not the only one challenging central bank independence; he is also not the most successful.  Indeed, the challeges are widespread and they have been growing for some time.  That is reason enough to pick up Paul Tucker’s book Unelected Power — which was recently named by Foreign Affairs as one of the top books published in 2018.  If you want a taster, my review of Tucker’s book from Survival is below.  The punchline is that while people are right to be concerned that Trump would violate the independence of the Fed, that does not mean either the Fed or any central bank should be left entirely to its own devices.

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Soft Law, Hard Ideas, and Borrowed Credibility

International political economy used to be about wealth and power.  Now the sources of influence and control are more subtle.  Governments choose to follow rules that are not enforced, they sign onto policies recommended to them by foreign nationals (or even ‘citizens of nowhere’), and they invite powerful non-state actors to assume control over crucial economic sectors, finance in particular.  Three recent books explain why this is so.

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Historical Memory and the Crisis in Europe

The fast pace of change in European politics has everyone focusing on current events.  Behind the scenes, however, politicians are manipulating how we view the past. Since change requires some kind of baseline or benchmark for us to appreciate its magnitude, we need to be very careful about how our memories are curated. The new ‘normal’ is only normalised when we forget just how far we have travelled and when we stop remembering (or appreciating) the lessons we learned through harsh experience.

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The Changing Relationship between Finance and Politics in Europe

The turmoil that struck Italian sovereign debt and bank equity markets on Tuesday, 29 June, is a stark reminder that the potential for another crisis is real, even if not imminent.  Important parts of the firewall that separates banks from sovereigns remain incomplete – and central bankers remain vulnerable to political influence as a consequence.  Two recent books help illustrate why.  One, by former Cypriot Central Bank Governor and Leicester University Professor Panicos Demetriades, reveals the limits of central bank independence.  The other, by University of Denver Professor Rachel Epstein, explores the interaction between banks and markets.

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Rigid Theories and Adaptive Markets

It is no secret that the economics profession is struggling to learn the lessons taught by the recent crisis. Two new books show where that thinking is headed. The End of Theory, by Richard Bookstaber, emphasizes the importance of focusing analysis on the world as it is, rather than on a more formal universe that is easier to model.  Adaptive Markets, by Andrew Lo, explores how much we could benefit from learning to tap the potential of modern finance.

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Great Powers Matter

International regimes for the management of inter- and intra-state conflict only work when they can operate in a stable regional security environment. International mediators can have the most skillful negotiators, the most credible ‘honest-brokers’, the most attractive incentives for peaceful reconciliation, and the most sophisticated political institutions for power sharing, but they are unlikely to succeed without the determined support of Great Powers and so long as there are other powerful actors in the region who encourage one side or the other to resort to violence. Moreover, this is an enduring feature of international relations; it was as true during the interwar period as it is now that the Cold War has ended. Security is a nested condition that policymakers and diplomats create from the outside-in and not from the inside-out.

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European Enlargement Changed Both Sides of the Continent

Something happened to Europe after the fall of the Berlin Wall and it affected both sides of the continent. That ‘something’ was not simply a diffusion of western ideas, policies and politics to the East. The former communist countries of Central and Eastern Europe underwent a profound transformation, but to say that they became ‘normal’ – and by saying that to mean they became more ‘western’ – would be an exaggeration. Such a statement would also overlook the impact of ideas, policies, politics, and people that spread from East to West. The history of Europe since 1989 is a story of ‘co-transformation’. It is also more contingent than teleological. Things did not have to wind up as they have – which is good, because there are many things about Europe that we should work hard to change.

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