When central bankers want to be politicians

Published in the New Zealand Herald (Auckland), 6 July 2021

Once upon a time, central bankers did not tweet. And not just because there was no Twitter.

In fact, it was part of central bankers’ job descriptions to be boring. The art of central bankers was not to say much but with many words. Their responsibilities for sound money and systemic financial stability were serious enough. They did not need further distractions. Nor did they need to provide any further distractions.

Not anymore. Last week, the head of the European Central Bank, Christine Lagarde, took to Twitter to tell the world about her latest speech: “As the pandemic passes, we need to shift focus from preserving the economy to transforming it,” she wrote. “To do that we must redirect investment towards the green and digital sectors.”

Inadvertently, in this single tweet, Lagarde summed up what is wrong with central banks these days, not just in Europe. Instead of focusing on their mundane job of organising money supply to ensure price stability and preserving financial system stability, central bankers are playing politicians. Or worse, they are playing God.

Now you might say that a single tweet should not be overplayed. But then again, just check out Madame Lagarde’s Twitter account. Under her handle @lagarde, she keeps almost 700,000 followers entertained and engaged. Hardly a day goes by without a political statement from the ECB’s President.

Not just on Twitter, Lagarde promotes the drive for more female leaders. She speaks about promoting gender equality and diversity. And, more often than anything else, she speaks in favour of climate-change initiatives.

To be clear, none of these causes are questionable. Quite the opposite, in fact. What is questionable, though, is their promotion by a central banker.

There once was a clear delineation of responsibilities between the spheres of central banks and politics. It was a bit like the old Mastercard commercial: There are some things that money can’t buy. For everything else, there’s politics.

Central banks had to ensure that the amount of money did not get out of line with the development of the economy. Because if it did, price stability suffered and financial stability was at risk.

Beyond that, central banks had to deal with the mundane technicalities of organising money flows in the economy, designing counterfeit-proof banknotes and facilitating foreign exchange. But the rest was none of central banks’ business. In any case, at least under the old Bretton Woods agreement, there were limits to what central banks could do. And those limits were set by a central bank’s gold reserves.

All of this changed the moment central banks could just create money out of thin air. That was in 1971, 50 years ago, when US President Richard Nixon severed the US dollar’s last links to gold. Prior to that, there was at least a possibility that paper money could be converted into something more solid. But not anymore after Nixon’s move.

From that time, central banks were freed from the limitations of gold. They could do whatever they liked to do. Print less money or more (well, typically more). Put a floor under stock market crashes (and often reverse them). Make it easier for governments to spend (by reducing their borrowing costs).

Central banks – and central bankers – gradually morphed from bureaucratic managers of money towards wizards of the economy. The epitome of this development was Alan Greenspan, the legendary head of the US Federal Reserve.

With his sibylline utterances, Greenspan could move markets. But typically, he would help bail out investors, prop up share markets and save the US government – albeit without Greenspan assuming the role of the capital “G” government. Greenspan was political but he was not a politician. He would not have been seen on Twitter, even had it existed back then.

The Global Financial Crisis of 2008 changed all that. Rather than quietly propping up economies in the background, central bankers took an active – and highly visible – role in the economy. Ben Bernanke for the Fed and Mario Draghi for the European Central Bank became key figures in the response to the crisis. Their actions kept banks and entire banking systems alive. They could even save entire countries from bankruptcy.

The power of central bankers during those GFC and Euro crisis years, about a decade ago, was astonishing. Never before did unelected officials wield so much political influence as back then.

If the survival of the entire Italian banking system and the Italian state depends on something as technical-sounding as the ECB’s Targeted Longer-Term Refinancing Operations, short TLTRO, then it was a clear sign that democracy had been replaced by central banking technocracy. And maybe, given the state of Italian democracy, that was even an improvement.

However, from a central banking perspective, that was still not the end of the road. If central banks can bail out insolvent governments, keep ailing banks alive and boost the stock market, why should they stop there? There are many other worthy causes for which some freshly created money would help.

So, in came central bankers like Lagarde. Instead of consigning themselves to central banks’ traditional roles, they embraced their new power. Especially as central banks can now create vast quantities of money via ‘quantitative easing’, the opportunities for using their money cannons are endless.

Recently, our own RBNZ openly pondered the possibilities of using its balance sheet for climate change initiatives. And, given the dozens of billions of dollars created, that is only too understandable.

Power corrupts and absolute power corrupts absolutely, said Lord Acton. One might add, absolute money creation power corrupts absolutely, too. So central banks, armoured with the power to keep governments afloat and markets working, now aim to use it for whatever political goals they please.

For Lagarde, the temptation must be huge, judging by her tweets. As a former French finance minister, she knows how difficult it is to organise parliamentary majorities and popular support for any policy. But as President of the ECB, she can do whatever she likes because she controls a humongous ATM machine – backed only by taxpayers who do not understand monetary policy.

It is a strange world in which we now find ourselves. While politicians are constrained by majorities and public finances, central bankers are unconstrained. They do not have to convince the electorate. They cannot run out of cash. They cannot be voted out of office.

No wonder, then, that central bankers sound like they are running the show. And thus, Lagarde tweets that “we” need to shift focus to “transforming” the economy. Never mind that it is not clear who that “we” refers to: the ECB, the public or some government?

And never mind that “transforming” the economy is not part of the ECB’s mandate. It is a political goal – but as such, it is a goal to be pursued by elected politicians, not central bankers.

Once upon a time, central bankers did not tweet. And perhaps that was just as it should be.

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