LONDON – Fifty years ago, a US president closed the gold window, ended capital controls and ushered in a new era of global finance. The “Nixon shock” overnight reshaped the international monetary system, then gradually changed the status of central bankers. Instead of acting as servants of the national economy, those responsible for monetary policy have become masters of the globalized and financialized world economy. And this development relates directly to our ability to cope with the problems of climate change and biodiversity loss.
Despite their technocratic mystique, central bankers are politically appointed officials on government payrolls and still derive their authority from the taxpayers of their respective jurisdictions. As the former Deputy Governor of the Bank of England, Paul Tucker, observes, “the right to create money is always latently a power to tax”.
The status and constitutional role of central bankers is therefore above all a democratic question, and not an economic or technical one. As managers of public institutions that have a monopoly on issuing currency and liquidity, they have impressive and powerful instruments that can only be deployed because they are backed by public treasuries.
The treasuries, in turn, are supported by a country’s fiscal resources – including tax revenues – and by public institutions that are vital to the private financial sector, such as the legal system responsible for enforcing contracts. . The stronger the public institutions and tax base of a sovereign state, the greater the powers of the central bank to generate liquidity, and the higher the country’s bonds and currency will be rated.
Despite the long-held 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 extended and deployed in the private interest of large unregulated and systemically risky capital markets throughout the “banking system”. parallel ”.
Reviewing the history of these developments, political scientist Benjamin Braun notes that “the stagflation crisis of the 1970s and [former US Federal Reserve chair] The overwhelming repression of inflation by Paul Volcker in the United States in the early 1980s “led to the transfer of responsibility for monetary policy from those who are directly accountable to elected officials. Since then, Braun argues, financialized capital has relied on central banks and “independent” arbitration tribunals to protect it. “versus local democracy.
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Meanwhile, the Bank for International Settlements has assessed the value of the extraordinary fiscal, monetary and macroprudential measures central banks have deployed since 2007 to support private financial markets and mitigate their negative economic impacts. Notably, BIS economists find that central bank programs aimed at buying private assets represented half of total purchases over this period. And as other researchers have shown, a significant portion of these financial flows has gone to support fossil fuels and other carbon-intensive sectors.
The overall sums at stake here are enormous. Earlier this year, the Eurosystem’s balance sheet exceeded € 7 trillion ($ 8.3 trillion), or more than 60% of the euro area’s GDP. The Bank of Japan’s balance sheet now stands at 130% of GDP. The Fed went from $ 4.3 trillion in mid-March 2020 to a peak of $ 8.2 trillion at the end of July 2021. This equates to about 40% of nominal US GDP, a level not seen since WWII global.
Additionally, since 2007 central bankers have used their public authority to participate in, influence and shape the vast $ 52 trillion shadow banking system, where they have become private brokers of last resort and market makers of first resort. . The expansion of shadow banking follows the period 1981-2014, when 30 governments around the world decided to privatize their pension funds. As a result, a large pool of global savings has flowed into asset management funds in globalized and largely unregulated capital markets. Because the sums were too large to be supported by the “main street” commercial banks, the shadow banking system emerged.
These earlier political decisions to financialize the global economy are still relevant today and will constitute obstacles to our efforts to address broader societal challenges such as climate change. Given the precarious state of the biosphere, it is imperative that the activities of central banks be reoriented towards what Braun calls “the public goal”, and away from the task of supporting private gains in capital markets.
Humanity is now facing terrifying climatic and ecological threats. While it is still possible to reduce greenhouse gas emissions at the rate needed to keep global warming below 1.5 ° Celsius, biodiversity loss is already well underway. In fact, we are heading towards the point of civilization collapse faster than scientists previously thought. In research published in the Proceedings of the National Academy of Sciences in June 2020, Gerardo Ceballos, Paul R. Ehrlich and Peter H. Raven argued that “the ongoing sixth mass extinction could be the most serious environmental threat to the persistence of civilization, because it is irreversible.(Emphasis added.)
Many, including key figures in the administration of US President Joe Biden, believe that ensuring the survival of human civilization is a task that can be left to private capital markets. At his first press conference as U.S. climate envoy, John Kerry paid tribute to climate-conscious BlackRock CEO Larry Fink and pleaded with Wall Street to come to the rescue of the climate plan. administration. US National Climate Advisor Gina McCarthy then insisted: “The question will not be whether the private sector will buy into it; the private sector will lead it.
During the Great Depression, the face most Americans associated with the response was democratically elected President Franklin D. Roosevelt. Are we now supposed to look to an unelected, irresponsible fund manager – or, perhaps, Fed Chairman Jerome Powell – to save human civilization from collapse? The current structure of global finance lends itself precisely to this undemocratic outcome. But we must resist it, lest we end up with a return of fascism on top of the climate crisis.
If we are to avoid both political and climatic collapse, we will need to transform the international monetary system so that it defends democracy and the political autonomy of nation states. It means reintroducing capital controls, re-regulating the global banking system, renationalizing pensions, and restoring the political and economic power of elected assemblies – not just their leaders and central bankers.
Of course, the separation of powers between central banks and politicians will have to be maintained to avoid corruption. But central bankers will have to be compelled, through legislation, to reorient their vast array of planning tools to the needs of democracy and the national economy.
Fifty years ago, a political decision by an elected president and his advisers overnight transformed the international financial architecture. Such democratic transformations are quite possible, and another is now urgent.