Overstrained ECB: When central bankers have to save the world

2021-07-10T01:44:48.748Z

Financial crisis, euro crisis, corona crisis, climate crisis: the European Central Bank gets involved in one alarm situation after the other. Above all, she is responsible for stable prices. Or is it not?

Enlarge image

ECB in Frankfurt am Main: It is a problem when central banks have to have a say in such important things

Photo:

ARMANDO BABANI / AFP

It's been in the air for a while - now it's out: Europe's central bankers want to help save the climate in the future.

This is what Christine Lagarde, head of the powerful European Central Bank, announced after an internal strategy debate.

The Governing Council had decided on a comprehensive plan of action to "consider ecological sustainability considerations more systematically in its monetary policy," it said on Thursday.

And the nagging in Germany is immediately great, especially since the central bankers have been intervening unusually vigorously for years and buying government bonds, for example.

Really?

What seems obvious at first glance, on closer inspection, could turn out to be a glorified fair-weather image of what central banks are supposed to do - from a time when the world seemed even simpler.

If monetary authorities around the globe intervene massively again and again today, it has less to do with a sudden mood, but more to do with the fact that there are many more crises and deeper economic difficulties today.

It probably needs a much more fundamental redefinition of what central banks do than the ECB has now formulated - and a lot more protection against the causes of the actual grievances.

Multi-billion amounts in a few hours

Of course, it seems crazy when central banks buy up double-digit billions of euros in bonds from states and companies every month - or, as with the outbreak of the corona pandemic in an emergency, buy up billions within hours because panic sales are increasingly being made on the financial markets.

That has little to do with the quaint idea that the holy monetary authorities, in independence, occasionally raise or lower key interest rates by a quarter of a percentage point.

Just as crazy is just to suggest that the esteemed central bankers would have nothing to do with me, nothing to you - perhaps because they wanted to do some finance ministers a favor with it.

Why then?

According to traditional understanding, the central bankers should simply ensure price stability through the ups and downs of interest rates - higher interest rates in good times so that the economy and prices do not overshoot (and vice versa).

Because everyone has something of stable purchasing power, it was said.

And because all other economic goals - whether full employment, proper state budgets or well-functioning financial markets - either run on their own or have to be guaranteed by the government.

According to the motto: What do the central bankers have to do with all of this?

So it makes sense to leave the guardians of money alone with this supposedly neutral-technocratic task - and to make them as independent as possible, as has been the dictum for decades.

Rescue succeeded, the financial party continues

Every time the central banks had to run and save - and be it as with Mario Draghi 2012 simply about: We save, no matter what it costs.

The message was enough to stifle speculation about the euro.

Crisis gone.

Sure, every rescue operation in itself contributed to the financial party being able to continue - only the rescue operation of the fire brigade was no less urgent. The local volunteer fire brigade also moves out, no matter who started the fire.

The stronger the influence of the financial markets, including the diverging wealth, the more shaky the assumption has become that what the central banks do beyond acute crises is per se completely neutral and good for everyone. Of course, it doesn't matter what the interest rate is. Those who have a lot of wealth benefit most from high rates, and the debtors suffer. Conversely, every bailout, as was the case most recently in the corona crisis, means that, for example, the banks, which have more money again as a result, also invest more money in shares again - which drives prices and has contributed to the top ten percent, the majority Hold stocks, have benefited more than average from the crisis. Conversely, it is not unimportant to discuss what would have happened in the real economy without intervention: if all experience indicates thatthat thanks to low interest rates, for example, a financial crash that would ultimately have been at the expense of the less well-off was prevented.

Such a financial crash often ends with high unemployment and falling incomes.

The same applies to monetary policy outside of acute crises.

If central banks want to curb inflation with higher interest rates, this also works by simply investing less at higher interest rates - and in case of doubt there are more unemployed.

Monetary policy cannot be reduced to simply monitoring stable price levels

The same basically applies to the climate crisis. Here, too, the assumption that the central bankers act clinically neutral, so to speak, is rather daring. If they buy supposedly equally neutral bonds from companies that are badly damaging to the climate, they are actually also contributing to the fact that it takes longer for these companies to invest in climate-neutral production. This cements existing structures at a time when there is social consensus that economic structures must change as quickly as possible to save the climate. What would that be democratic?

In any case, there is something absurd when central banks spend so much money every month to buy bonds in 2021 without contributing more actively to the solution of what is possibly the most dramatic problem of our time with the large amount of nice money. Especially since it cannot be ruled out that in the next climate shocks all those financial stocks that are still heavily dependent on fossil fuels will crash - which in turn could lead to the next crash. That too would not be in the interests of our monetary authorities.

All of this together fundamentally calls into question how the forefathers of the clinically neutral and independent central bank world had imagined it. Monetary policy is (today) neither neutral nor socially reducible to the pure monitoring of stable price levels. No matter how much the central bankers and their masterminds wish it. What they do is de facto always politically and democratically relevant.

Of course, it is a problem when central banks somehow have to have a say in decisions about such important things as financial stability, wealth distribution and unemployment - without being elected and having to give adequate democratic accountability.

Only that is how reality is.

And it doesn't help to scold the rescuers for it - you don't scold the fire brigade for coming to extinguish the forest fire and getting everything wet while extinguishing it.