Central bankers should work to serve the people, not the markets
- Since 2007, central bank resources have been expanded and deployed in the private interests of vast, unregulated and systemically risky capital markets across the shadow banking system
- Such an undemocratic outcome must be reversed and power put back into the hands of elected governments, if we are to avert the climate crisis and looming civilisational collapse
Fifty years ago, a US president closed the gold window, ended capital controls, and launched a new era of globalised finance. The “Nixon shock” reshaped the international monetary system overnight, and then gradually changed the status of central bankers.
Despite their technocratic mystique, central bankers are politically appointed public servants on government payrolls, and still derive their authority from the taxpayers in their respective jurisdictions. Central bankers’ status and constitutional role is therefore primarily a democratic question, not an economic or technical one.
As the managers of public institutions that hold a monopoly over the issuance of currencies and liquidity, they wield powerful instruments that can be deployed only because they are backed by government treasuries.
Treasuries, in turn, are backed by a country’s fiscal resources – including tax revenues – and by public institutions that are vital to the private financial sector, such as the judicial system.
Despite the ideology of “free markets”, capitalism has always depended on public institutions and resources for its capital gains and profits, just as central banks have always presided over a hybrid private-public financial system.
What is new is the extent to which central bank resources (balance sheets) have been expanded and deployed in the private interests of vast, unregulated and systemically risky capital markets across the “shadow banking” system.
The Bank for International Settlements (BIS) has tallied up the value of the extraordinary fiscal, monetary and macroprudential measures that central banks have deployed in the wake up of the Covid-19 pandemic to shore up private financial markets and mitigate their adverse economic impacts. Notably, BIS economists find that central bank programmes to purchase private assets accounted for half of total purchases over this period.
As other researchers have shown, a significant share of such financial flows since 2007 have gone to support fossil fuels and other carbon-intensive sectors.
The overall sums involved here are massive. Earlier this year, the Eurosystem’s balance sheet rose to €7 trillion (US$8.2 trillion), which is more than 60 per cent of the euro zone’s GDP. The Bank of Japan’s balance sheet now stands at 130 per cent of GDP.
The Fed’s grew from US$4.3 trillion in mid-March 2020 to a peak of US$8.2 trillion in late July 2021. That is equivalent to about 40 per cent of nominal US GDP, a level not seen since World War II.
Moreover, since 2007, central bankers have used their public authority to participate in, influence and shape the vast US$52 trillion shadow banking system, where they have become private dealers of last resort, and market makers of first resort. The expansion of shadow banking follows from the 1981-2014 period, when 30 governments around the world privatised their pension funds.
As a result, a vast pool of the world’s savings flowed into asset management funds in globalised, largely unregulated capital markets. Because the sums were too large to be accommodated by commercial “Main Street” banks, the shadow banking system emerged.
Humanity is now facing terrifying climate and ecological threats. In fact, we are moving faster towards the point of civilisational collapse than scientists previously thought.
In research published in the Proceedings of the National Academy of Sciences in June 2020, the authors argued that “the ongoing sixth mass extinction may be the most serious environmental threat to the persistence of civilisation, because it is irreversible”.
The US national climate adviser, Gina McCarthy, then drove home the point: “The question won’t be whether the private sector is going to buy into it; the private sector is going to drive it.”
In the Great Depression, the face most Americans associated with the response was the democratically elected president, Franklin D. Roosevelt. Are we now supposed to look to an unelected, unaccountable fund manager – or, perhaps, to Fed chair Jerome Powell – to rescue human civilisation from collapse?
The present structure of globalised finance lends itself to precisely this undemocratic outcome. But we must resist it.
If we are going to avert both a political and a climate breakdown, we will need to transform the international monetary system so that it upholds democracy and the policy autonomy of nation-states.
That means reintroducing capital controls, reregulating global banking, renationalising pensions, and restoring political and economic power to elected assemblies – not simply to their executives and to central bankers.
To be sure, the separation of powers between central banks and politicians will have to be maintained to avoid corruption. But central bankers will need to be required, through legislation, to reorient their vast array of planning tools to the needs of democracy and the domestic economy.