The most significant change occurred during the last twenty years on the economic scene has been the growing importance, not to say the omnipresence, taken by central banks. We are watching, every quarter, what the Federal Reserve is about to decide regarding interest rates, we relied on ECB to save euro, Shinzo Abe has put all his hopes on Bank of Japan to boost the economy which is stagnating for twenty years and, in Beijing, Governor Xiaochuan decisions are considered as being at the origin of the disorders which have affected Shanghai stock exchange and which had impacts on the other financial markets.

It looks like if government policies were pushed into the background, being paralyzed by an excessive indebtedness and by the difficulties facing the adoption of “structural reforms”, which are less able to attract any media attention. Political leaders also benefited of the protection of central bankers, including finance ministers, who were not the last to find that protection comfortable.

But that could not have been possible without a theoretical background to the economic role of monetary policy. Its terms did not get unanimity among economists. For some, money supply growth had to be determined once for all and not to be manipulated. For the others, it was an economic tool, as public expenditures, to be used to achieve economic goals as price stability, growth and employment. It is, of course, the second economic school which has prevailed and is at the origin of today central banks mandate. Monetary policy they have the duty to manage, with a variable level of independency in different countries, became the key instrument of public policies. Interest rates fixing and money supply management through interventions on bonds markets were supposed, initially, to avoid any inflation spiraling out of control in weighting on demand. In making credit more onerous, both consumption and investment were kept in check, which favored price moderation. Symmetrically, during the low phases of the economic cycle, a loose monetary policy supported economic rebound.

But all these theoretical arguments, which are still today taught, are completely out of date. First, and for a long time, inflation, in developed countries, has vanished. The opening of the borders has created a level of competition which has protected consumers from price rises in a much more efficient way than, for instance, the bureaucratic controls existing in France since 1945, which have been released in the middle of the Eighties. On top of that, innovation and huge productivity gains have affected almost all activities, and we are not at the end of this phenomenon. At last, raw materials prices fall, due, in some case, to technical innovation, shale gas for example, has accentuated the trend. That motivated the decision to adopt, as a goal, an increase of the level of prices of 2%, in order to facilitate the situation of heavily indebted states. So we are confronted with this astonishing paradox: the main purpose of Central Banks intervention has disappeared but their role has never been as important as today and their decision scrutinized with such an interest.

As another break off, the theory was constructed when financial markets had little opening on foreign transactions. Money supply fluctuations were supposed to act on internal demand. Today, monetary policy main impact is on exchanges rates and generates capital flows, which can create retaliations abroad and “currency wars”. And monetary policies, with interest rates fluctuations have a significant impact on financial markets. That appeared for the first time in October 1987 when the Bundesbank and the Federal Reserve gave the impression to follow opposite strategies. Wall Street sank with a 21% fall in a single day, the most important crash since 1929 crisis. Since that period, things became worse and each central bank meeting is scrutinized to try to assess the consequences of its decision on relevant markets.

The world is much more open and it is also much wealthier due to saving accumulation in developed countries. The consequences of central banks decisions are, for this reason, more important. They have a bigger influence on the prices of financial assets than on the demand of goods and services. The third change is the consequence of the first two: financial markets became much more volatile, even dangerous and the media coverage of central banks decisions increases these risks. To be convinced, it is enough to watch the reactions to the last Chinese decisions, by the way rather modest, in comparison with what is done in Europe or in the U.S.

 Hopes put in central banks decisions to solve growth and unemployment problem have been disappointing since their tools are not any more relevant regarding the current world situation. It is the States duty to take back the responsibility and to implement appropriated economic policies. States have structural characteristics different from each other, demography first, whose importance is underestimated, then geopolitical, with various  involvements abroad, and even economic, with, for instance the fact that a country produces or not its raw materials. An appropriated renationalization, especially in Europe, is now indispensable. Is it to say that central banks must be relegated in the background? Definitely not. The trend which reduces their role in the achievement of economic equilibrium, goes along with a rise of financial risks. The 2007-2008 financial crisis brought the evidence of that change and the situation is not near to be reversed.

Since that, central banks assignment, and they are already working on the issue, but it is still in the background, should be to protect the stability of the world financial system, with the issuance of more and more rigorous prudential rules and the supervision of the banking sector to be sure that these rules are respected. Central banks should also consult each other much more than they do it today before taking any monetary decision, to be sure that their decision will not affect the good working of the other financial markets. The purpose is to reverse the order of the priorities. Instead of focusing on local macroeconomic issues, according to their current mandates, which will have to be adapted, one day or another, central banks should build a global monetary and financial governance. They would adjust their decisions in order to avoid affecting other zones and financial markets equilibriums. Their local action should be concentrated on the control of financial actors to avoid any bad mistakes. Their main focus would become more prudential than macroeconomic.

The current conception of monetary policy must leave the priority to a more collaborative vision in economic issues and central banks efforts should be reoriented toward the supervision of financial agents. Central banks have the capabilities and the resources to achieve this mutation, but it is clear that this will be done at the detriment of their media exposure. Are they ready to accept it?