What does the post-2007 web of interdependencies between monetary authorities, systemic banks and other leading financial actors look like? Why is this important to understand the prospects for change?
Responses by central banks, particularly the Fed, after the Covid-19 crash were decisive and strong – and prevented a meltdown. What are the likely distributional effects of this rescue operation in the longer term? Where are the politics in all of this?
How does ideology play a role in the ability to imagine a different monetary system?
Benjamin Braun (PhD) is a Senior Researcher at the Max Planck Institute for the Study of Societies in Cologne and a member of the School of Social Science at the Institute for Advanced Study, Princeton (2019–2020). His research focuses on the comparative and international political economy of financial and monetary systems and has been published, among others, in Economy and Society, Review of International Political Economy, and Socio-Economic Review. He tweets at @BJMbraun.
(Note that this is a quick summary, not a verbatim report)
The first episode of Crash Course last week was with Jens van ‘t Klooster. He dealt with the ideological origins of Central Bank independence, and why money and monetary policy is always political, and not merely a technical matter. This is the second episode, with special guest Benjamin Braun of the Max Planck Institute for the Study of Societies in Cologne and with the title “Central banking, finance and power”. He will dig deep into the “web of interdependencies between monetary authorities, systemic banks and other leading financial actors”.
Benjamin starts where Jens had left off, with the explanation of the position of Central Banks according to conventional monetary economic views. Central Banks are exempted from democratic control, for a large part, in order to achieve especially one particular goal: price stability/low inflation. A different perspective, a Critical Political Economy View, states that Monetary policy operates in and through political markets. Central Banks shape the financial system and the question is if the financial system should (or should not) be shaped by the needs of monetary policy.
It is important to make a distinction between two types of economic state capacity: administrative versus market-based state agency. States are not only regulators, but also participant in financial markets (by issuing debt, and open market operations by the CB).
Prior to the 1980’s central Banks routinely used direct (administrative) monetary policy instruments (credit controls, interest rate ceilings). But later on they shifted to indirect instruments (standing facilities, open market operations).
Infrastructural entanglement has two sides: on the one hand public actors provide the backstop for the creation and trading of private credit money. And private actors provide the infrastructure through which public monetary governance operates. Central Bankers are trying to manage these infrastructural entanglements. This also means that finance has large infrastructural power, a reversal of Michael Mann’s concept of the infrastructural power of the state:“There could not be a large sophisticated capitalist financial system without a central bank”.
Infrastructural power is not the only form of power that finance has, there is also instrumental power, and structural power. Infrastructural power operates similar to structural power and does not require large organizations or lobbying, but simply that certain state actors depend on financial markets for governance related interests, for instance to issue sovereign bonds into ‘deep and liquid’ bond markets.
Monetary governance is a public good, but a financial system does not enhance that per definition. Some historical examples of infrastructural power (with suggestions for further reading)
1970’ s Petrodollar recycling through the Eurodollar market: Who will issue the debt to absorb the oil exporters petrodollars, and who will finance the deficits of the oil importers?
1990-2000’s Repo market in US and UK/Europe
2008-2018 ECB and securitization market; ECB revived market for asset backed securities, allowing private banks to unload ‘toxic assets’.
Graphics of large scale asset purchases (2010-2020) by Fed, BoJ and ECBshow an enormous increase from only a few USD trillon in 2008 to 16 trillion in 2020.
With Covid-crisis all Central Banks are buying any financial security they can., The consequences are grave and it benefits the financial markets first.
Benjamin Braun ends his introduction with two quotes., One is from French economist and ECB-executive Benoit Couré, about Central Banks who should not play a role in financial structures, while they always have, and envisioning alternatives should start with that knowledge.
The other one is from former chair of the Federal Reserve Janet Yellen, exclaiming that though working through financial markets, their goal is to help main Street, not Wall Street. But there is the Catch 22 of infrastructural entanglement. With financialization Central Banks have an increased capacity to act, but are also disproportionately protecting financial interests. The distributional costs are ever higher.
In the formulation of alternatives we can also distinguish between a state-led approach - with large public investment and credit policies - and a market-led approach with state-role limited to price signals and risk-weights. Without legislative changes the second option will prevail.
Rodrigo Fernandez: We have seen many effects of current ‘entanglement’ of Central banks in financial markets, such as increasing wealth inequality. But how does this play out in corporate debt? How does infrastructural power relate to the non-financial corporate world?
Benjamin Braun: A crucial question that touches the question of alternatives: less via macro economical measures, more via fiscal policy (less financialised). More private sector debt is the intended effect of QE. In the beginning Central Banks were buying more secure debt like government bonds and triple A rated mortgage bonds (by the Fed) This was aimed at portfolio re balancing effect and the investors that sold the safe bonds would receive freshly created central bank money and would invest that into higher risk assets, like equities, and make loans to households and companies to buy bonds. So it is aimed at making it easier for households and corporations to go into more debt.
Rodrigo Fernandez: In theory this would trickle down into real investment, employment, etc. But the result was the large scale purchasing of their own shares, so it was all spent on shareholders. We have seen now that it does not work. Why would a new even more aggressive round work of QE?
Benjamin Braun: Initially there was some of this intended chain of event, also in previous rounds it was already made more easy for private equity to leverage their capital to buy firms, who would issue junk rated bonds to pay them back.... But now we see that the Fed is buying junk rated bonds directly, a large share of whom had been bought out by private equity funds and are still owned by them. This sector is getting a kind of new bailout in the new round of QE because of covid-19. It shifted from only high rated government securities and corporate bonds, to even low rated corporate bonds. A nice example of infrastructural power moving from the core of the financial system (banking) now to hedge funds and private equity, a large extension.
Sara Murawski: Could you explain what backstops are?
Benjamin Braun: Backstops are basically the Lender of Last Resort option of Central Banks. If banks loose the ability to access liquidity then the Central Bank steps in, and can do so in various ways.
Sara Murawski: Can you explain why technocratic governance is often juxtaposed to democratic control, and why central banks are exemplary thereof?
Benjamin Braun: Discursively it is opposed to democratic control, but not always in actual institutional arrangements. The original idea of Central Banks independence is that they have to be independent from politicians who have short term electoral interests and so would make short term spending and increase inflation and decrease price stability. But now this independence is also required for all kinds of activities that have almost nothing to do with price stability policy. The Central Bank should indeed fulfill the role of plumber of the financial system, but now we see that Big Finance comes with Big Central Banking and vice versa. And we need to ask which of these functions of the CB do we want beyond direct democratic control? The EP could for instance be empowered to a lot more oversight of things the ECB is doing.
Sara Murawski: Could you explain how they could in change work for the common good and for the democratization of the current architecture?
Benjamin Braun: If a democratic majority was always in favor of price stability, there would be less need for democratization. There might for instance be a preference for stimulation of the economy and higher inflation, but then the Central Bank would step in. Owners of bonds, overlapping the first top 1 %, are the most damaged by inflation. The power struggle was won by the financial sector and that is the reason for this situation. There is a class dimension to Central Bank independence.
Rodrigo Fernandez: Lukas Spielberger (PhD candidate at Leiden University) asks: “Isn't the reliance on deep and liquid bond markets for state spending the result of a self-imposed constraint, namely the monetary financing prohibition? If the central bank pursued different sterilization strategies for state spending (e.g. term deposits or central bank bonds) primary bond markets would not hold that infrastructural power? Rodrigo rephrases: Isn’t the prohibition that Central banks can directly finance states the heart of the matter?”
Benjamin Braun: Yes, that is why there is this prohibition in the Maastricht Treaty, and in the statute of the ECB. This gives financial markets the power to be the arbiters of state spending plans. If the ECB could short circuit this, this would strongly reduce the infrastructural power of the private financial sector.
Rodrigo Fernandez: In what way could monetary financing be organized, isn’t this a fruitful area for progressive parties and organizations?
Benjamin Braun: Absolutely and this is kind of what was debated last week in the economic committee in the EP, the mandate of the ECB, we published a short article in Social Europe, stating basically more money to refinancing is good. But not necessarily only monetary financing. The goal is to reverse the hierarchy between state and financial market when it comes to financing state expenditure. The state has all kinds of powers to eg. force domestic investors to buy bonds, also at the EU level.
Sara Murawski: Grace Blakeley asks “Can we now argue that central banks are effectively targeting the prices of assets like equities and corporate bonds with their interventions (even if their mandate is technically still confined to inflation targeting)? And where is the line between CBs targeting asset prices and state planning via central banks in the interests of private investors?"
Benjamin Braun: n a sense there is a great continuity with inflation targeting as it was conceived initially in the early ‘90s. Also there is a clear class dimension, there was always a preference for protecting price stability over employment, protecting the interest of wealth owners over those of employees. With increasing fictionalization and increasing importance of income from financial assets for overall investment dynamics in the economy, Central Banks have more and more moved to targeting asset prices. There was already the story of the Greenspan Put, he would forcefully lower interest rates every time there was a significant jitter in the US stock market. The effect of all this is to protect the value of financial asset portfolios. That influences the overall wage level in the economy. To keep asset prices high, wages have to be kept low.I
Sara Murawski: What is the difference between the response of the Federal Bank, ECB and Bank of England?
Benjamin Braun: In the recent years the ECB caught up with the other central banks but was more cautious in the beginning. It didn’t dare to do QE up to 2015, then they caught up, and now there is not a structural difference.
Rodrigo Fernandez: Nikhilesh Sinha asks: “Katherina Pistor’s Legal Theory of Finance suggests that financial systems are hybrids between state and market, and the hierarchies that are inherent mean that in a crisis, the enforcement mechanisms favor those who are closest to the state, punishing those at the peripheries. What are the implications of this for your theory?"
Benjamin Braun: Brief answer: that is what he meant when he said that the infrastructural power is the strongest at the core of the financial system.
Rodrigo Fernandez: Jens van 't Klooster asks: “Where do you situate the current European Commission green deal agenda and taxonomy on the scale you proposed between private and public approaches? What are the risks in terms of infrastructural entanglement?”
Benjamin Braun: This is complicated, there is a reason that it is called Green Deal and not a Green New Deal, which refers to Roosevelts New Deal, so state capacity at a very large scale with strategic long term goals in the economy directly. This may become a part of the Green Deal agenda, but for now there are some very discouraging signs, such as the commission hiring Blackrock to help defining a green taxonomy, as opposed to having this done by public actors.
Rodrigo Fernandez: There are several questions on legislative changes needed to limit or change the infrastructural entanglement, what change would you envision?
Benjamin Braun: The most radical thing would be to insulate governments from international financial market pressures when they issue bonds. There are various ways to do this and one term used by economists is ‘financial pressure’. Another area is fiscal policy especially in Europe but also in the US, the extreme increase of Central Bank power and activism is the other side of the coin of diminished capacity for fiscal action. Macro-economic stimulus could be done via for instance strategic green investment programs on a large scale that would stimulate demand in the real economy directly. That would reduce the need for Central Banks to stimulate the economy by basically targeting asset prices and hoping that rich people then will spend more, which as was said is a problematic theory of macro-economic policy.
Sara Murawski: Alexandros Alexandropoulos from University of Bologna asks “My question is slightly interdisciplinary and comes from a political theory perspective. Today Central Banks are subject to a soft form of democratic accountability. What institutional designs can we theorize that would allow higher democratic transparency and accountability of central banks? Is that even possible in the current international financial structure?” And Ben King asks “Do independent central banks require a greater degree of democratic oversight and how could this be achieved?”
Benjamin Braun: That is a key part of any progressive agenda for central banking. The status quo here is extremely undemocratic. There is no reason that the parliament should have no say in the conduct of monetary policy and certainly not all the other things that central banks are doing, such as the plumbing of the financial system, financial structure design, international monetary diplomacy and so forth. So one could think of parliamentary commissions that develop expertise over time, in order to interact eye to eye with Central Banks, or like the circle of young academics in the Decenat Zukunft here in Berlin where we published a proposal along these lines; a recurring political process by which the CB mandate is up for renegotiation and a renewed democratic political process every few years. The idea that price stability should be the overarching goal for anything the Central Bank does, is an idea from the 1980’s, and the days of inflation are long past.
Rodrigo Fernandez: Any ministry of Finance would laugh about this. Mainstream media are also opposed to this way of thinking, how could we change this notion?
Benjamin Braun: The overton window would have to shift a bit to get there and conventional wisdom is still very much attached to this fiction of Central Bank independence, so they might laugh at you but if you speak to anyone on the inside, Central Bankers or seasoned technocrats or even financial market insiders: everybody knows that Central Bank independence is also a fiction. Central Banks coordinate with governments all the time. And they have to, because they are agents of the government. Once we make that clear and repeat it infinite times, this will become clear.
Our new Crash Course on monetary policy, central banks and ideology is a platform designed to open up debate on how we can move out of the current crisis and make the necessary steps towards achieving social, economic and ecological justice. Crash Course is inviting global experts on monetary policy to break down complex issues in lay terms and make them accessible to all so that we can understand how to shape our global monetary policy for a fairer future.