Three Perspectives on Money, Finance, and Central Banking

Last autumn I reviewed three books that highlighted different perspectives on money, finance, and central banking that deserve closer attention. 

In the first book, Gottfried Leibbrandt  and Natasha de Teran point out that the main reason to have money is to make payments – which means that when you start to change the payments system, you wind up changing just about everything connected to money.  That ‘wallet’ on your cell phone is only the tip of the iceberg.

In the second book, Fabio Mattioli explains that when we talk about finance, we are primarily talking about forward looking contracts – and those contracts are only as good as their enforcement.  By implication, a financialized economy looks very different when politicians start deciding which contracts will be honoured and which will not.  Any debate about ‘rule of law’ goes to the heart of the financial economy.

In the third book, Willem Buiter reminds us that the central bank is a public asset owned by the national state. If national governments accounted for that asset in their balance sheets, they would uncover important revenue streams that could stimulate the economy and reduced burdens on taxpayers.  The ‘helicopter money’ that policymakers talked about both during the global economic and financial crisis and at the start of the pandemic is not as strange or uncommon as you might think.


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Why We Need More Diverse Central Bankers

US Federal Reserve Chairman Jerome ‘Jay’ Powell opened a window on the central bank’s new monetary-policy strategy in August 2020 by stressing that he was focused on the Fed’s ‘core constituency, the American people’. A few days later, the Dutch central-bank governor, Klaas Knot, gave a speech in Amsterdam to underscore that the job of the central-banking community is ‘to manage the risks that normal people have to face’. This was no coincidence. Both men were responding to a call made in 2019 by the Australian central-bank governor Philip Lowe for monetary policymakers to ‘talk in stories people can connect with’. If former Fed chair Alan Greenspan could once pride himself on being incomprehensible, that time is over. Central bankers need to be understood – and quickly.

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The European Central Bank as Hostage

The European Commission’s proposal for a ‘next generation’ recovery fund is an important step in forging a common response to the economic challenges that will follow in the wake of the COVID-19 crisis. Together with fiscal efforts at the national level, this fund should add useful stimulus to European economic performance. What remains to be seen is how the negotiations will play out within the European Council. There is reason for optimism but also reason for caution in that respect.

Meanwhile, the European Central Bank remains the primary source of macroeconomic stabilization. When the ECB’s Governing Council meets on 4 June, we should expect to see them add more stimulus of their own into the mix. The pandemic emergency purchase program will need to be larger. The Governing Council may need to adjust some of its other instruments as well. But Europe’s heads of state and government should be under no illusion that such actions will solve Europe’s macroeconomic problems or that they take any pressure off the European Council in agreeing on an ambitious recovery fund. The ECB can buy more time, but it cannot be the only game in town. And, as we have seen, even buying time is getting expensive. Increasingly, the Governing Council finds itself in situations where it is damned if it does and damned if it doesn’t: The ECB is a hostage to the effects of this crisis, to the actions of the European Council, and to the economic and political consequences of its own policy response – both real and imagined.

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Why Is the ECB Politically Independent?

The recent decision by the German Constitutional Court has triggered an avalanche of commentary about the primacy of European law and about the political independence of the European Central Bank. These are important issues for debate. I am persuaded by colleagues like R. Daniel Kelemen, for example, that you cannot have a ‘rule of law’ in Europe without a clear hierarchy of legal interpretation. Hence, while I can see the point being made by the German constitutional court about its obligations to uphold the constitutional rights of German citizens, I can also see why the European Court of Justice would insist on having the last word in any assessment of whether a European institution acted within its European mandate.

By contrast, the debate about the political independence of the ECB has taken a detour. The focus lies too narrowly on whether complying with the German court would or would not violate the ECB’s political independence given the wording of the Treaty on the functioning of the European Union and the Statute of the European System of Central Banks. That focus is too legal and in any event crabwalks back into the debate about the primacy of European law. The focus should lie on why the ECB is politically independent instead. Along the way, we should ask whether that independence is necessary for the ECB to forge an effective response to the current economic crisis.

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This Is What European Disintegration Looks Like

The European Council decided during a summit organized to address the COVID-19 crisis on 23 April to confirm a European Commission program to support national insurance systems. They also approved a program by the European Investment Bank to support lending to small and medium-sized enterprises, and another by the European Stability Mechanism to make loans available to national governments to pay for health care expenses related to the pandemic. Finally, the Council asked the Commission to set out a roadmap for the creation of a ‘recovery fund, which is needed and urgent’. Supporters of the decision hailed it as an unprecedented leap toward a Europe of solidarity; critics decried it as vague and insignificant. They are both wrong and right at the same time.

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Getting Ready for the 23 April European Council

The European Council will meet by video conference next Thursday.  When it does, the three main items on the agenda will be to approve the recommendations made by the Eurogroup on 9 April, to push forward the conversation about a European Recovery Fund, and to restart and restructure the talks about the upcoming multi-annual financial framework.  In English, that means the conversation will be about money.  Like any conversation about money it will be difficult.  The opportunities for misunderstanding are everywhere.  Now is a good time to sort out some of the issues.

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Why Share Risk through the ECB?

I am an American – an outsider – not a European. I have been studying and living in Europe for a while; I wrote my doctoral dissertation on Dutch politics; I spend more time now looking at politics in Italy. Alongside that political interest, I have spent much of the past thirty years looking at European monetary integration. Europe has taught me a lot, but there are still many things I find confusing. Top of the list right now is that the governments of the euro area would rather accept a higher shared risk in the ECB than they would face if they agreed to share risks through an institution specifically designed to raise credit in the markets. This strange choice about how to share risks matters because the risks the European face have never been greater.

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Paolo Gentiloni: Macroeconomic Governance in the Crosshairs

Paolo Gentiloni began his tenure as European Commissioner today by giving an interview in Corriere della Sera. He spoke about a number of the major issues the new Commission has to face, but the part of the conversation that made the front page ran something like ‘the reform of the European Stability Mechanism is not a threat.’ Flip to page three and the title is even more explicit: ‘There is no plot in Brussels against Italy.’ European macroeconomic policy coordination is politically explosive. Gentiloni is the Commission’s first line of defence.

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Central Bank Independence and the Future of the Euro

Central banks are never independent from politics. The bankers who run those organizations may have the institutional power to define their own objectives, the technical capability to adjust the settings on their monetary instruments, and strong legal protections around the terms and conditions for their employment. But none of that is enough to insulate them from politics. Determined politicians will find a way to exercise influence, no matter what the obstacles. More often than not, such politicians will do so without even implicating the legislative process. They do not have to rewrite the laws to violate central bank independence. Politicians only need to take advantage of the fact that central bankers come from society, they (and their families) have to live somewhere, and eventually they will also retire.

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Modern Dilemmas of Central Banking

Central banks have been in the news a lot lately, with Mario Draghi’s dramatic decision to redeploy the full range of unconventional policies alongside Jerome Powell’s more obvious ambivalence about loosening the monetary spigots. In part this is a function of timing. The business cycle is turning and yet central banks have not quite managed to reset their instruments after the last crisis. Part is also due to overload. Central banks have been ‘the only game in town’ for a long time, they have expanded responsibility for prudential oversight, and politicians seem none too eager to assume responsibility for macroeconomic performance. It would be a mistake, however, to focus too much on short term explanations. Three recent books explore some of the deeper forces that have pushed central bankers into the spotlight.

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