‘Woke’ central bankers filling a political void
Central bankers have a lot of opinions – and they’re not shy about sharing them. For all the huffing and puffing about the need for politicians to respect the Reserve Bank’s independence, there’s been very little public outcry about central bankers the world over expanding their remits over the past decade.
From climate change to inequality, central bankers have an opinion on everything. Last month, our Reserve Bank’s financial stability report contained a section supporting the Government’s decision to force large companies to disclose the risks posed to them by climate change. The month before, governor Adrian Orr gave a speech on climate change’s effects in the Pacific, titled ‘‘Progressing Climate Action by Driving Transformational Change’’– not a traditional realm for a central bank governor.
On the other side of the world, former Bank of England governor Mark Carney fought to get large corporates to disclose climate-related risk, as ours are now doing. Having now left the bank, he’s calling on corporate boards to link executive pay to how well execs cut company emissions.
In the United States, Janet Yellen, Joe Biden’s nominee for Treasury secretary, used her time as Federal Reserve governor to blast inequality. It’s a long way from the traditional Reserve Bank mandate of targeting low, sustainable inflation and, in some cases, employment.
And it has ruffled a few feathers. Central bankers the world over have been criticised for being too woke and taking their eyes off the ball. Politicians fought hard to give central banks their all-important independence. Now it seems all central bankers want to do is become politicians.
But the idea of an allegedly political central bank governor deserves a defence. We should at least questionwhether they are in fact being political at all. They certainly don’t think so.
The Reserve Bank says it’s interested in climate change because of its threat to the stability of the financial system. In otherwords, climate change is no different to the US subprime mortgage crisis.
They’re right. Westpac’s climate risk disclosure last week showed it had billions of dollars of exposure to climate change risks, mainly because 2.3 per cent of its $55.2 billion in residential mortgages is vulnerable to sea level rise. Left unmitigated, that exposure would quickly turn an environmental problem into an economic one.
As the market encroaches upon more and more of our lives, you can make a similar argument that the remit of central bankers should get commensurately larger; why stop at climate change when things like inequality and social cohesion also have an economic effect?
Carney argued earlier this year that markets were failing to appropriately value some of the most important things in life – community, society, and health. The US Government could spend as much as US$18B in super-charging Covid-19 vaccine development – a shadow of its US$721B defence budget. Balancing these priorities could have saved the US billions in lost growth and potential deflation – very much the responsibility of a central banker.
An awful lot of things have at least some bearing on inflation, employment, and financial stability, but should they all be the purview of central bankers?
In the minds of the central bankers, it appears their narrow mandates, and the operational independence ceded to pursue those mandates, aren’t much more than a convenient fiction. They haven’t overstepped the boundaries laid out in the 1980s and 90s; it’s just that previous governors took too narrow a view of their remit. The narrowness of the inflation remit ignored the environmental and social effects of monetary policy.
If the mandate is a fiction, we’ve got to ask whether it’s a useful one. That question ismore difficult to answer.
Yes, in some sense, everything in the economy is connected to everything else. Maybe we should put central bankers in charge ofmaking sure we’re happy at work, because happy workers are more productive, and productivity is a great way for the economy to grow. Problem solved.
But by putting central banks in charge of everything, you risk diluting their effectiveness in dealing with the things they’re really good at: inflation and employment. Yes, there’s a certain intellectual dishonesty to a central bank’s narrow, single-minded focus, but it’s a single-mindedness that’s incredibly effective.
Another factor driving central bankers’ everexpanding remit is the relative retreat of fiscal policy. As more democracies succumb to the sclerosis of divisive populism, or unambiguous managerialism, the power of fiscal and regulatory policy has diminished. That’s left a void central bankers have had to fill.
Perhaps the first and last political act of a central banker should be to remind politicians to be political again.
Politicians fought hard to give central banks their allimportant independence. Now it seems all central bankers want to do is become politicians.