#4 Monetary policy against austerity? — with Daniela Gabor

Transcription

According to Jens Weidmann (president of the Bundesbank) we are living in diabolical times now, as many public figures are calling for the return of monetary financing.

Central Banks have moved away from fiscal authority in terms of holding the debt issued. After the 1980’s, a different macro-economic paradigm emerges and Central Banks become ‘independent’ and basically stop monetizing government debt. This goes hand in hand with a changing composition of the holders of government debt.

Promotional versus prudential monetary financing

There are different types of monetary financing regimes. We can differentiate between two types of monetary financing; promotional and prudential. The logic of buying government debt by central banks is not the same in these two regimes. From 1940-1970, we had an era of promotional central banking. This was in the setting of a broader regime of industrial capitalism, with a specific institutional hierarchy. Fiscal policy was in the driving seat, policy makers lived under a Keynesian paradigm.

With prudential monetary financing regime, the purpose of buying government debt is not so much to keep government financing costs low, but to maintain financial stability. In financial capitalism, government bonds become very important as a financial asset that supports credit creation through bond markets. The logic of intervention is to preserve liquidity. The Central Banks make markets of government bonds, but only as a last resort to promote financial stability. Prudential monetary policy can even go along with austerity. This is were we are heading to at the moment. The question for progressive economists is what the strategy should be.

How did we get to that prudential monetary financing regime?

There were three stages: First, the rise of neoliberalism in general, following Milton Friedman et al. The assumption was that Central Banks doing monetary financing would increase inflation. This lead to the idea of Central Banks Independence, which was very successful. The second stage is private finance as intermediary. It relates to debates in Modern Monetary Theories about the institutional relation between the Central Bank and fiscal authority. In this stage, shadow banking (the repo market) offers sovereign debt liquidity. This in turn functions as a safe collateral for market-based finance. This grounds an infrastructural power for finance.

Stage three starts around the collapse of Lehman Brothers and is growing stronger now due to the Covid-19 crisis. The idea is that Central Bank function as market-makers of last resort for sovereign debt. The logic is prudential and the goal is to preserve liquidity, with low interest rate government bonds. This form of monetary policy is prevailing in high income countries (where finance is much more market based), but is starting to become a trend in emerging markets. It can be consistent with a very neoliberal state and austerity. COVID 19 accelerates the shift to prudential monetary finance regime. A lot of Central Banks now have announced interventions in secondary/sovereign bond markets, in order to preserve their liquidity.

On the two regimes, with monetary financing it matters under which conditions it occurs, promotional or prudential. In the second situation it is much more market mediated, political structures have less to say. The distinction is important because otherwise you could easily conclude that we are going back to the period of 1950-70, the period of Keynesian aggregate demand management and financial depression. But now it doesn’t have the same logic, the private financial sector does still have a lot of power in a triangle with the Central Bank and the treasury. So the logic of Central Bank monetary financing changes dramatically. What ian active fiscal authority can do, remains the question in this situation, especially now that the public debt versus the GDP-ratio is exploding. This also brings one back to the question how to the engineer green transition. With a prudential policy, this seems not very likely.

The structural transformation to low carbon economies demands promotional monetary financing

The main question is how to deal with climate crisis in the context of covid-19 crisis. Greening global finance requires reducing the infrastructural power of finance (also see the Crash Course episode with Benjamin Braun).

There is a need for a green developmental state and new mechanisms of coordination between Central banks and treasury.

Rodrigo Fernandez: So for an effective monetary policy for a global green new deal monetary financing alone is not enough, it has to be aimed at a regime change, otherwise the quantity would not be channeled in the right way.

DG: Monetary financing is becoming fashionable but entirely defined by the Central Banks. There is no (public) coordination with fiscal authorities. It is the CB that decides and that constrains which policy is possible. No green deal is possible without a profound change in the way in which we organize our institutional relationships between different macro-economic institutions. Without that, any effective green deal will be impossible.

Sara: You are quite critical of the Green new Deal an its taxonomy, and warn for green washing. But there is also the question how to finance it. You would advocate more public finance, but who are the main actors?

DG: There are many debates on green financing. Roughly, we can discriminate between two types: monetary and fiscal financing. With the goal of greening balance sheets in mind, as well as the greening of unconventional monetary policy interventions and collateral framework, Central Banks nowadays follow markets to make policy decisions.. But private markets do not properly price climate risk; they cannot and have not been willing to. Proper pricing would produce a lot of stranded assets and increase the costs of financing for dirty industries, which goes against their interests. Private finance will not greenify by itself. But Central Banks claim they have to preserve their neutrality, and thus follow markets. It would be much more effective for governments to be in the driving seat through fiscal policy. And it would have much more democratic legitimacy.

Do we need more debt in order to finance the transition? Probably we do, but with political will, the private sector could also become greener a lot quicker. In that case you do not need a lot more public debt. But their infrastructural power of private finance shields them from that. So you have to change the institutional arrangement and go back to the promotional logic.

Q&A

Giuliano Parlascino: Do you see the validity of your case for monetary financing as being dependent upon the persistence of low levels of inflation? That is, do you see ‘promotional’ monetary financing as a temporary measure which is desirable under specific circumstances (e.g. low inflation) or as a policy tool which should be a permanent, integral part of any macro-economic regime.

DG: If you advocate for promotional monetary finance, any monetarist asks you what happens to inflation. That is a very valid question. Not everything is clear, but Central Banks should start to learn to love green inflation. High carbon products should increase in price and that should not be a problem. It helps to reallocate resources and strengthens the transformation towards a green economy.

Secondly, there is a long debate on the drivers of inflation in general and in this particular junction. There are many other factors in the struggle between capital and labor, and they can be managed in different ways. I do not think monetary financing should be a temporary measure.

Rodrigo: You say that inflation is produced by a broader set of struggles in the political economy. In his book Between the Debt and the Devil, Adair Turner states that this can only be executed when banks and capital reserves are made higher, so that banks cannot multiply or refinance and enlarge inflation. So should monetary financing go hand in hand with curbing banks?

DG: The logic of monetary financing in the framework of a green transition requires the shrinking of the financial system. We can either shrink through green rules or through all kinds of other regulatory measures, like capital requirements. Changing the direction and the practices of credit allocation by the banking system and the shadow banking system are a necessary part of financial monetization by Central Banks.

Michelle Groenewald: I would be really interested to hear Daniela's opinion on how we convince colleagues to acknowledge (and teach) that monetary and fiscal policy is not just a technical matter, but that there are inherently political aspects to this?

DG: That is a very good question. I am optimistic about it in the sense that when Central Banks start to talk about monetary financing again, you know that economists will have to start thinking about it. Of course, there is a steep hill to climb, because of all the issues you have to school yourself on how market based finance works and why it is important to think about the infrastructural power of finance.But we are getting there. It is also important to think about the technical and political aspects of private finance and the taxonomy. The rules of green financing are being written now and there are not many people who are participating in this highly political debate.

Joao Silva: Dear, Professor Gabor, My name is Gabriel and I am Speaking from Brasilia, Brazil. I have been studying monetary policy and its relations to law. Even though we are totally aware of this recent shift in monetary policy approach we are constantly backstopped by the consensus with one concern: inflation. Generally they say that MMT and a more active role played by the central bank is rich countries stuff and can´t be applied to developing economies. What do you think about it?

DG: I don’t want to engage in a debate on MMT. They have done us a great favor in political terms, because they have made visible the mechanics and the relationship between Central Banks and the treasury in a way that hasn’t been done in a long time. There are several points of disagreement too.

Take for instance the black box of the institutional relationship between the Central Bank and the treasury. How does this work for emerging countries? They are overcoming the taboo that you cannot monetize government debt, because this would make us all Venezuela. There are very significant constraints to how promotional monetary policy could happen, simply because we have had 30 years of a monetary policy regime and a fiscal policy regime. We are told that it is good for a non-resident financial investor to hold our debt and it is good to have liquidity in markets and to be credible vis-a-vis international markets. To move away from this is very difficult and requires a significant restructuring of the paradigm. But my message is that just to say “monetize government debt” is not enough. It has to go hand in hand with a massive increase in the technocratic and political ability of the state to conduct economic policies and to conduct green industrial policies.

Emma Burgisser: Which international fora, if any, would be the place to make the case for moving to more promotional monetary financing systems globally? Which are more/less powerful in this area and which are more/less open to progressive monetary policy?

DG: Besides Crash Course it would be the UNCTAD. They have been doing very important work on mapping why financial capital can generate very destructive forces for developing countries, can become an impediment for green deal type of institutional arrangements,

We have to work through asking the right questions. I am very pleased to hear Central Banks now talking about monetary financing...

Juliana Bolzani (doctoral student, Duke Law School): Thinking in terms of political strategy and considering a rise in the number of populist government leaders, is now a good time to push for central banks financing governments?

DG: Obviously, we also need movement on national level. We need established political parties and green or environmental activist movements, pointing at the possibility of progressive economy, but right wing governments (looking at it from the perspective of Hungary) draws much political energy. The rise of populism has to do with the institutional arrangement, where the Central Bank is an outpost of private finance. We cannot wait until these governments go away. Be realistic and dream the impossible to quote Che Guevara, who once was a famous central Banker.