We trust Central Bank governors. They are after all, civil servants – not masters of the universe – there to serve the citizenry, not just the finance sector. And they are charged to act as ‘guardians of the nation’s finances’.
So when the deputy governor of the Bank of England says in a report on the nation’s financial stability on the 1st May, 2008 that: “the most likely path ahead is that confidence and risk appetite will return gradually in the coming months” we are inclined to believe him. His comforting words were echoed by that American civil servant and central bank governor of the Federal Reserve, Ben Bernanke, who said in a speech on 9th June, 2008 that “although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
But then a cautious citizen turns to Page 27 of the Financial Times of 14th June, and reads that European banks have a $400 bn hole on their balance sheets, in spite of raising a great deal of money from the capital markets this last week. Furthermore there are fears of another American bank failure – Lehman brothers – ‘a dead bank walking’ according to critics quoted in the FT on 14th June.
A cautious citizen would extrapolate from this first, that confidence is unlikely to return; second, that risks have not diminished over the past month or so. Third, that therefore our public servants are either a) deluded or b) unaware of the state of banks’ balance sheets.
This could cause a cautious citizen to lose confidence in the pronouncements of central bankers.