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An Apocalyptic View of Central Banks

In the department of genuinely terrible, and terrifying, ideas, I just got the a request from Simon Youel, the Media and Policy Officer at Positive Money, regarding the appointment of Mark Carney's successor as Governor of the Bank of England.  Positive money is organizing a "joint letter to the Financial Times, calling on the Chancellor to ...

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In the department of genuinely terrible, and terrifying, ideas, I just got the a request from Simon Youel, the Media and Policy Officer at Positive Money, regarding the appointment of Mark Carney's successor as Governor of the Bank of England.  Positive money is organizing a "joint letter to the Financial Times, calling on the Chancellor to appoint someone who’ll foster a pluralistic policy-making culture at the central bank."

The proposed letter:
Applicants to be the next Governor of the Bank of England are asked to commit to an eight year term lasting until 2028. By then the world will be a very different place.  
Three key trends will shape their time in post. Firstly, environmental breakdown is the biggest threat facing the planet. The next Governor must build on Mark Carney’s legacy, and go even further to act on the Bank’s warnings by accelerating the transition of finance away from risky fossil fuels.  
Secondly, rising inequality, fuelled to a significant extent by monetary policy, has contributed to a crisis of trust in our institutions. The next Governor must be open and honest about the trade-offs the Bank is forced to make, and take a critical view of how its policies impact on wider society. 
Thirdly, the UK economy is increasingly unbalanced and skewed towards asset price inflation. Banks pour money into bidding up the value of pre-existing assets, with only £1 in every £10 they lend supporting non-financial firms. The next Governor must seriously consider introducing measures to guide credit away from speculation towards productive activities.  
As the world around it changes, the function of the Bank itself must evolve. Its current mandate and tools are increasingly coming into question, and a future government may assign the bank with a new mission. The next Governor must meet this with an open mind, not seek to preserve the status quo. 
To equip the Bank to meet the challenges of the future, the new Governor will also need to ensure it benefits from a greater diversity of backgrounds, experience and perspectives throughout the organisation. 
The Bank of England’s own stated purpose is to promote the good of the people. We need a Governor genuinely committed to serving the whole of society, not just financial markets.

He adds that the letter so far "has support from civil society and academic institutions such as the IPPR, Progressive Economy Forum, and the UCL Institute for Innovation and Public Purpose." In addition, it is "inspired by Mariana Mazzucato and Josh Ryan-Collins’ excellent letter to the Evening Standard," which includes
One critical challenge is productivity and sustainable growth. The UK banking system has seen an ongoing decline in the share of business lending — the textbook role of banks — since the Eighties, so that today only about £1 in every £10 supports non-financial firms.
Another is inequality. While lowering interest rates via quantitative easing helped avoid a worse recession and saved jobs, it pumped up house prices and equities, bringing windfall gains to the already better off.
Finally, there’s the biggest challenge facing the planet: climate change. Mark Carney, the current governor, arguably led the advanced-economy central banking community on this issue, and central banks are becoming aware of the financial risks posed by climate change. But so far there is more rhetoric and research than action from financial regulators.
(Ryan-Collins and Mazzucato are, respectively, Head of Research and Director of the, UCL Institute for Innovation and Public Purpose.)

Climate change, inequality, diversity, fostering "real investment" not "financial speculation," who can object?

I do not object on policy grounds. (Well, I do, but that's for another day.) These are fine issues for a democracy to debate, and if these authors were arguing for, say, Jeremy Corbyn to be the next prime minister of the UK, I would not object to their making the point, or soliciting signatures.

But this is about a central bank, and encapsulates a lot that is going wrong with our central banks -- much of the fault their own making.

You may or may not think that carbon emissions are the "biggest threat facing the planet." Personally, while not denying carbon, I think war, pandemic, non-carbon-related environmental collapse and general social and government breakdown, are (even?) bigger threats. But if carbon is, in fact, our greatest threat, what is a central bank supposed to do about it?

A central bank is a powerful, and (so far, and apparently not for long) politically independent institution. The classic understanding of such an institution is that great discretionary power and political independence are granted in a democracy only in return for a sharply limited mandate and limited tools. If a central banker is asked about carbon policy, the correct answer is "our mandate is inflation, employment, and financial stability. Carbon may be a terrible problem, but until you change the mandate it's not our job. We are legally forbidden to implement carbon policies. Talk to the EPA. Moreover, we are only allowed to set the short term interest rate, not carbon policies."

And for a good reason. Again, what in the world is a central bank supposed to do about carbon? I doubt the authors are really hot to get the Bank of England to run its computers off solar panels on the roof. Likewise "accelerating the transition of finance away from risky fossil fuels" does not mean de-carbonizing private bank offices. It means systematically using the central bank's regulatory powers to channel investment away from oil producers, distributors, coal miners and electric companies that use coal, car companies who don't implement mandates fast enough and so on. It means trying to exclude them from financial markets, from banking, and even from the payments system, as various agencies already do to pot farmers, and as our Treasury does to North Korea and Iran. It means forcing banks and financial market participants to follow green energy policies as the price of admission, as banks are now forced to participate in small business, community development, and other bank-directed lending. Or, simply to shut them down.

If the government wishes a regulatory war on fossil fuels, these are fine steps. But these are intensely political steps. The vision that an independent central bank should decide, on its own, that carbon is the biggest problem facing humanity, and use its regulatory power -- granted for the prevention of financial crises -- to wage a war on carbon emitters, is a quintessentially autocratic vision. Put our guy in charge, and shove it down their throats. In a democracy, that cannot stand. Intensely political actions must come from politically accountable agencies. And any agency that takes it in mind to do such things will not, and cannot, remain independent for long.

A central bank that takes "inequality" on as a self-appointed mandate violates the terms of its independence even more egregiously. Again, the point here is not whether "inequality" is a problem. Yes, in my view, barriers to opportunity are a huge problem, but society is not made better off if a wealthy person loses $1000 and a poor person loses $50 so we are more equal.  I also note that our recent supply side growth has done more for inequality than a decade of progressive governance. But that's not the point. "Inequality" is even more of a partisan political buzzword than "climate." Nothing is more political than policies that deliberately transfer resources from one group to another,

The letters make the astonishing claim that central banks should deliberately work to stop asset price increases, on the grounds that such increases raise (wealth, not income) inequality. Hmm. The US fed tried that in 1929, and it worked like a charm to reduce inequality. That central banks should try to manipulate stock prices at all is bad enough. To manipulate them as a means of transferring income is... well a new function for central banks.

Should a central bank governor be "genuinely committed to serving the whole of society?" should central banks take on climate, inequality, and diversity? Should the head of the postal service refuse to send mail to and from coal mining companies and billionaires? Should the Labor Department target them for regulatory harassment to put them out of business?

They have one thing just right: There certainly is
 a crisis of trust in our institutions.
But I do not terribly blame the authors too much. Central banks have drifted to acting far outside their traditional scope, morphing into macroeconomic and financial-regulatory planners.  And to be fair, they do envision that "a future government may assign the bank with a new mission." This is a plea for a formally politicized central bank as well.

If, as the second letter claims, Governor Carney sought to signal virtue on climate change, they are just RSVPing to an invitation. Fed officials have been speechifying about a range of, er, nontraditional issues as well. For example, Former Fed Chair Janet Yellen wandered into inequality in several speeches. Again, perhaps inequality is a great problem, but it is not, traditionally, the Fed's problem, the Fed's mandate, in the Fed's deal for independence, and it is an intensely political issue, being the buzzword of one political party in an intensely polarized age. No matter how she feels about inequality, talking about it while Fed chair and encouraging Fed staff to start working on it sends the Fed into deeply political territory. That Positive Money and company want to go further in this direction, or that President Trump wants to make clearly political rather than technocratic appointments in response, is only RSVPing yes to an invitation. Or, perhaps, the Fed must wander into every economic issue that comes over the political transom. But in that case, kiss independence goodbye.

Note: This did come as an email, and I usually do not post emails. But it was spam (obviously!), which I think lowers the standard. And I do not pass on the email address. If you want to sign or anti-sign the letter, you'll have to figure that out on your own.
John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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