Put Central Bankers In Their Place By Howard Davies


The current lax monetary policies in developed economies are likely to increase wealth inequalities, and in the short term, there is little that monetary and regulatory authorities can do about it. Rather, solving the problem will require finance ministers with a strong political mandate to implement redistributive measures.

LONDON – In the Forbes list of The most powerful people in the world for 2012, Ben Bernanke, then chairman of the US Federal Reserve, held the sixth position, while Mario Draghi, then President of the European Central Bank, came in eighth place. They were both ranked above Chinese President Xi Jinping. As the global economy grappled with the aftermath of the global financial crisis that began in 2008 and its European cousin, the eurozone crisis, central banks were in the driver’s seat, quantitatively easing as if it didn’t. there was no tomorrow. They were, it was often said, “the only game in town”. Even then, some believed there was an element of madness of grandeur in their elevation.

This time it’s different. Although central banks continue to buy bonds incontinently, fiscal policy has been the key response to the COVID-19 pandemic. In the United States, President Joe Biden and Congress led the charge. In the European Union, the ease of recovery and resilience of the European Commission is at the heart of the European Next Generation plan of 750 billion euros, while in the United Kingdom, Chancellor Rishi Sunak signs the checks.

The nose of central bankers, when they play the role of second fiddle behind finance ministries, is there therefore a position in the orchestra that few aspire to?

It seems they are, because the last 18 months have seen a remarkable expansion in the fields of activity of central banks, largely driven by their own ambitions. They have therefore entered the arena of climate change, arguing that financial stability can be threatened by rising temperatures, and that central banks, as bond buyers and as banking supervisors, can and should. be proactive in increasing the cost of credit for businesses without a credible transition plan. This is a promising new sector of activity, which should develop.

Central banks are also trying to engage in social engineering, in particular the policy response to rising income and wealth inequalities, another hot topic with strong political significance. In part, this new interest in inequality is a defensive move. Central banks have been stung by growing criticism that their combination of low or even negative interest rate policies, combined with quantitative easing, has provided the wealthiest members of society with huge no-commitment gains by making drive up asset prices.

Lucky members of society who have money to invest in stocks, high-end goods and expensive works of art have seen their net worth increase rapidly as funds poured into asset appreciation. Central bankers were therefore forced to defend their actions and try to prove that, taken as a whole, the chosen policy mix also benefited the poorest families by supporting jobs. Some have been convinced by this argument; others not so much.

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The mixed reaction prompted further reaction from the monetary authorities. One element was rhetorical. In 2009, less than 0.5% of all speeches by central bankers recorded in the Bank for International Settlements (BIS) database mentioned inequalities or the distributive consequences of their policies. In 2021, the figure is 9%, almost 20 times more.

But talking is cheap. Is there any evidence that a concern for inequality has influenced policy? Indeed, is there any evidence that monetary policy can be used to moderate or reverse growing inequalities?

BIS Chief Economist Claudio Borio, believes that there is. He argued late last month that “monetary policy can do a lot to promote a more equitable distribution over business cycles.” Part of the argument is traditional, taken from the Central Bank 101 manual. It refers to the “damage that high inflation can cause to the poorest segments of society” and shows that income inequality tends to increase. decrease when inflation is on average less than 5%. . So far, so conventional.

But he admits that there may be a problem if interest rates are kept low for a long time to fight the recession. Under these circumstances, “there may be a compromise in terms of wealth inequality”. This is especially true, he believes, in the case of financial recessions, which can be more lasting, and where interest rates must be kept low for a long time to help offset excess credit. So what’s the answer? It is “a more holistic macro-financial stability framework”. Oh dear.

I have nothing against holism, should I add. But it can be vague as a policy guide. In this case, this primarily means that governments should compensate for the impact of an accommodating monetary policy on income and wealth inequality through the use of fiscal policy to ensure that after-tax inequality is moderate. They should also work on regulating the labor market to rebalance bargaining power in favor of employees. And they should invest more in education. These are all, of course, good things, but they take us away from the central bank.

Can central banks really just pass the buck to the ministries of finance and the economy? Not quite: if they’re financial regulators, they can help promote financial inclusion and literacy, but it takes decades to make an impact. It may also be that macroprudential policies can be used to mitigate credit booms and recessions, which may reduce the magnitude of the problem that low interest rates are supposed to solve. It is too early since their introduction after the financial crisis to know if this will be the case.

The slightly depressing conclusion is that the current parameters of monetary policy in the developed economies of the world are likely to create greater inequality of wealth, and that in the short term there is little that monetary and regulatory authorities can do, if not to mention it in the speeches. If the problem is to be resolved, we will need to see finance ministers with a strong political mandate to implement redistributive policies, rather than Fed chairmen and governors feature high on this power list. decade.


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