World's new financial monarchs

In a subtle but significant shift in the management of global affairs, the major economies of the world are increasingly being run by central bankers instead of elected politicians.

Call it the Greenspanization of the world.

From Japan to Europe to the United States, more power is flowing to the new financial monarchs as political leaders find it increasingly difficult to steer economies, either because of fiscal or political constraints.

The emerging triumph of monetary over government-directed fiscal policy - the two basic tools used to guide economies in the postwar era - makes it easier in some ways for countries to respond to changing conditions.

Because central banks are independent, largely free of the day-to-day pressures of politics, they can act quickly to change interest rates and money supplies to rouse or restrain economies. But that very independence raises an enduring question: As central bankers exert more control, are they accountable enough?

Monetary policy is now "the dominant power," says Paul Kasriel, an economist with Northern Trust Co., Chicago. It is "the most important stabilizing or destabilizing policy that exists."

The United States typifies the shift in stewardship. President Clinton often takes credit for the good economic times. His high status in public-opinion polls reflects in some degree the bustling economy. (And if there were a slump, Mr. Clinton would likely be blamed by the public.)

But to most economists, Alan Greenspan, chairman of the Federal Reserve, has far more impact on the economy than Clinton or anyone in Congress.

Similarly, in other industrial countries, nonelected and highly independent central bankers are key to economic developments.

"Most countries used to talk about monetary and fiscal policies," says Allan Meltzer, an economist at the American Enterprise Institute in Washington. "But fiscal policy [government taxing and spending policy] has been immobilized."

In the US, both Democrats and Republicans find themselves hog-tied by Clinton's desire to use budget surpluses to "save Social Security" and by spending caps Congress has imposed on itself. Any tax cuts and spending increases are likely to be modest.

Bumper guards on growth

In Europe, a "stability pact" that 11 nations agreed to in forming a common currency for the euro-zone, launched this year, has nearly frozen fiscal policy. Individual nations are not supposed to let budget deficits rise above a level equivalent to 3 percent of gross domestic product, a nation's output of goods and services. Most nations are close to that level now.

And the Japanese government "has reached the limits of how much it can borrow," notes Paul Krugman, an economist at the Massachusetts Institute of Technology in Cambridge.

Tokyo has implemented massive spending programs to revive Japan's dormant economy, creating huge budget deficits in the process. But these have had little success. So in New York, London, Tokyo, and other major capitals, financial analysts' eyes are focused on central banks.

Right now, the Bank of Japan (BoJ) and its governor, Masaru Hayami, are being watched to see if monetary policy will be eased enough to revive the world's second most powerful economy.

In Europe, politicians are putting pressure on Wim Duisenberg, president of the new European Central Bank, to cut interest rates and thereby stimulate the economies of the euro zone. Unemployment stands at 11 percent.

So far they haven't succeeded. Last weekend, French Finance Minister Dominique Strauss-Kahn called for lower interest rates, repeating a message often made by his German counterpart, Oskar Lafontaine. The left-of-center regimes in Bonn and Paris are bothered by a slowdown in economic growth in their nations.

In the US, the Fed has allowed rapid growth in the nation's money supply to counter the impact of financial crises in East Asia, Russia, and, most recently, Brazil. It cut interest rates sharply last fall.

To Mr. Meltzer, US monetary policy is too easy. He heads a group of academic and business economists, called the Shadow Open Market Committee, which critiques Fed policy. Meeting Monday, the group called on the Fed to replace its "mistaken policy" and tighten the money supply.

Some economists see the Fed in a bind. If it raises interest rates to slow the growth of money and thereby restrain output, it risks upsetting the stock market. This would hit millions of Americans with money in the market either directly or through pension plans. They could cut back on spending, bringing a recession.

Should the Fed raise rates without "clear evidence" of inflation, it would upset investors, says Mr. Kasriel. Their attitude is, "Do anything you want, but don't mess with my 401(k)" - a type of pension plan.

J. Paul Horne, a London-based economist with Salomon Smith Barney, an investment banking firm, notes that the value of US stocks is now 169 percent of the annual after-tax income of Americans, up from 77 percent in the first half of the 1990s. This indicates the growing importance of the stock market to the feelings of financial well-being in the nation.

Yes, but can they perform?

For Europe, a major dilemma is that the new European Central Bank has no track record. Mr. Duisenberg and its other policymakers are trying to prove that it's as tough as the German Bundesbank in fighting inflation. But no one knows the impact of the monetary policies of this 11-nation aggregate bank on growth and inflation.

The growing importance of monetary policy has raised an old question about the merit of the independence of central banks. Meltzer likes the technique employed in New Zealand. There, the government gives the central bank specific inflation targets. If it fails to meet the target, the central bank governor must offer his resignation.

In Canada, the Bank of Canada and the Department of Finance have negotiated a 1 to 3 percent inflation target in recent years.