In the past few months, the world’s central banks, above all the US Federal Reserve, have rescued the global economy from complete collapse for the second time in a generation. Wading unto the breach and armed with the knowledge of how close capitalism came to a system failure in 2008, they have fired the “big bazookas” of monetary policy, pumping trillions of dollars into the world’s giant pool of money, effectively creating wealth out of nothing.
Since 2 March, the Fed’s total assets have leapt by more than half. Since 2008, its balance sheet has grown to 30% of the size of the US economy. Central bankers seem confident their actions will find public approval. “A firefighter has never been criticised for using too much water,” the governor of the Bank of Canada said.
This confidence is misplaced. Both left and right have reason to welcome the Fed’s emergency intervention, but new money flooded into private capital markets will inevitably flow into the deepest pockets. And without strengthening the democratic legitimacy of this policy, and using it for socially transformative ends, the reaction will strengthen those who are antagonistic to the practice of government – the populist right.
In his recent book, the French economist Thomas Piketty observes that central banks have become the only effectively functioning organs of government. He doesn’t mean this as a good thing. “Monetary activism” is financial triage against world economic collapse, but it’s also an avoidance tactic. It works by bracketing democracy and letting the technocrats take over. To make decisions about justice and distribution, discussions about taxation, policy and budgets are needed.
As the Fed chairman Jerome Powell put it, the central bank has the power to lend but not to tax and spend. It is up to elected officials to “make decisions about where we as a society should direct our collective resources”. In the last two months, he has all but begged Congress to be more proactive in shaping the direction and volume of the policy.
Progressives have reason to praise central banks for offering evidence that the “money printer can go brrr” without any clear limit. Economists see no sign of inflation on the horizon. Some have become concerned about inflation in recent weeks, but others worry about the opposite – deflation. All the extra liquidity has not managed to translate into meaningful growth.
This makes an active role for the state in hiring people in sustainable jobs – in green energy, construction, arts, healthcare, education – all the more important. Public spending of the New Deal helped cure the Great Depression in the 1930s, so why not a Green New Deal for this one? Central bankers have emerged as unlikely allies in the fight against climate change. Maybe this latest intervention could finally open them up to the idea of “Green QE”, (quantitative easing) actively supporting decarbonisation by buying up environmentally friendly bonds.
Republicans, for their part, are relieved that the Fed rescued the economy from meltdown, giving Donald Trump at least a chance of campaigning amid a recovery. Though unemployment is stratospheric and hundreds of Americans are still dying of Covid-19, the stock market’s worst fears seem to have been allayed by congressional action and the Fed’s promised bond-buying spree. But neither side should feel secure under the sheltering hand of unelected power like the central bank.
The politics of money has a way of quickly becoming about other things. Last month, the German constitutional court concluded in a shock ruling that the European Central Bank may have exceeded its mandate in creating so much cheap credit, threatening the monetary response to the crisis. Within days, Viktor Orbán suggested that the Hungarian constitution might trump the decisions of the European Court of Justice in his country’s treatment of refugees.
What kind of political creatures could the money-printing of central banks spawn? We have seen hints in the past. A decade ago, the proactive Fed was a target for the Tea Party movement. Republicans directed the backlash to control of the House in 2010 and eventually over Congress. Opposing President Barack Obama, the Republican party acted as a drag on recovery efforts and robust healthcare reform. The US is paying the price for their efforts with a dysfunctional healthcare system in a pandemic in which the victims have been disproportionately African American.
There are reasons to think the response to the Fed’s actions from the right might be more extreme this time, not only because the scale of both spending and suffering is greater, but also because the fringe itself has become radicalised.
Central banks have no shortage of enemies in waiting. President Trump’s description of the Fed as the “enemy” is designed to rob it of the very democratic legitimacy it cannot live without. Libertarians who reject all forms of “fiat currency” unbacked by precious metals, commonly known as “gold bugs”, have grown in influence over the past years. In the US, the most famous libertarian gold bug is probably Ron Paul, whose demand to “End the Fed” ran through his 2008 campaign. His son, Senator Rand Paul of Kentucky, and Senator Ted Cruz of Texas have also voiced support for a gold standard. Returning to currency that is matched by finite gold reserves could act as a lever to lock in austerity, blocking the expansion of credit and state spending that would be necessary to redress inequality.
In Germany, another gold bug, a former precious metals consultant, Peter Boehringer, sits in the Bundestag. His party, the Alternative for Germany, was founded by economics professors in 2013 over the politics of money – they rejected the European Central Bank’s monetary policy and management of the eurozone crisis.
Another erstwhile gold bug now waits in the antechamber of the Fed itself. Until its recent postponement, Congress was scheduled to vote on the nomination of Judy Shelton to the Fed. Citing Ludwig von Mises and his student Friedrich Hayek as her guides, Shelton has called repeatedly in the past for the return to the “sound money” of a gold standard before converting to Trump’s loose monetary policy.
For now, alongside the rumblings of a backlash, the actions of the Fed are receiving broad public approval. Elected officials should take this support as a sign that people do not instinctively reject a role for the government in the working of the market under emergency conditions.
Lawmakers have time to build on this insight to work with central banks to design economies where uncertainty and hardship are diminished, even after coronavirus has passed. Central banks can be accessories to more equal and just societies, but they can never be the architects. Money must be made to serve the people, not the other way around.