End Central Banks

Since 2008, the chairman of a nation’s Central Bank has been more important to domestic economic policy than congress or the nation’s president. Congress has basically been replaced by the Treasury. The White House has been replaced by the Fed.

Investors are making more of a note of this lately. Elected officials…are disappointing, to put it gently.  “If investors could short congress, that would be the biggest play in the market,” Paul Dietrich, CEO of Foxhall Capital Management in Orange, Conn. told me.

Following last year’s meetings between Ben Bernanke and Treasury Secretary Timothy Geithner, both have nearly begged Congress and President Obama to lead so they wouldn’t have to provide liquidity to jump start the economy.

The presidential campaign trail is like a repeat of the early 1990s, where upstart Bill Clinton beat George H.W. Bush when he successfully convinced Americans “it’s the economy, stupid.”  And while Ron Paul has failed to convince the general public that “it’s monetary policy, stupid”, the Texas Congressman said during the primaries in New Hampshire that, “never before has monetary policy been such a central theme on the campaign trail and so important to the nation.”

That’s not only true in the U.S., it is also true in China, India, Brazil and all of eurozone, where the European Central Bank and the International Monetary Fund are busy coordinating an international effort with Finance Ministers globally to help protect southern Europe from bankruptcy. People in countries like Greece, Italy and Spain are losing their incomes. The politicians are at whit’s end. Central Bankers are in charge, keeping the economy on life support where politicians have been unable to do so on their own.

This might very well be the worst nightmare of at least one presidential candidate. The Fed hating Ron Paul has warned against Central Bankers running the economy. Have we finally reached the point where bankers really do rule the world?

Earlier this month, at the Federal Reserve in St. Louis, Mohammed El-Erian of PIMCO said as guest lecturer, “Let me say right here that the analysis will suggest that central banks can no longer – indeed, should no longer – carry the bulk of the policy burden. This is not a question of willingness or ability. Rather, it is a recognition of the declining effectiveness of central banks’ tools in countering deleveraging forces amid impediments to growth that dominate the outlook. It is also about the growing risk of collateral damage and unintended circumstances.”

But whether it is in Washington or Mumbai, Central Bankers are indeed running the show. To them, and to most of us, the elected officials have failed.

Last week, when Indian Central Bank president Duvvuri Subbarao reduced interest rates by a surprisingly high 50 basis points to help the economy, some market pundits warned that this was the last help the government could expect from Subbarao until Indian politicians put the country’s fiscal house in order.  Subbarao has more power than the country’s president, Prathiba Patil, and probably more than her chief advisor and Prime Minister, Manmohan Singh.

At this point, the president is ceremonial. He attends parties. He dances. He sings. He kisses babies. He has hot ex-actress or model mistresses until they figure out how impotent their man really is.  The real power — the real guys making the economy run in crisis mode — are the Finance Ministers, Treasury Secretaries and Central Bankers.  Congress, globally, and especially in the West, are largely missing in action, more interested in the next election, or devising clever new sound bytes for the 24 hour cable news shows, the agreeing on long-term solutions to the debt crisis and growing inequality. It’s not a Central Banker’s job to care about the public good. They are not elected to care about social security and healthcare reforms.