At the heart of central banking is a puzzle: Why should we allow unelected people to run the economy in a democracy? The answer is this: central bankers need to be independent of both financial markets beholden to business cycles and politicians beholden to political cycles, so that they can afford to think about the long term.
Central bankers must be independent guardians of our collective future. But what does this mean? Up to now, we have thought too narrowly about what we mean by a long-term perspective.
As I explain in my book, "Financial Citizenship," central bankers are supposed to modulate economic trends — keep the economy from overheating by acting as a brake on spending when times are good by making borrowing more expensive, and encourage spending when times are tough by making borrowing cheaper. The only legitimate concerns of central bankers have been keeping inflation at bay and addressing unemployment.
Yet at this moment, around the world, citizens are beginning to ask central bankers to fight short-termism. From Occupy Wall Street on the left to End the Fed on the right to organizations like London’s Positive Money, which aims to “reform” England’s money and banking system, citizen movements are demanding that the central bank’s purchases further social goals like climate change and tackling inequality.
Since the financial crisis of 2008, central banks have moved to a more radical form of market intervention — “qualitative easing” — which involves buying corporate debt and the stocks of private companies in very large quantities.
The Federal Reserve and other central banks now manage portfolios that have swelled into the trillions of dollars — making them, arguably, the largest public investor group.
This means the decisions central banks make have what economists call “distributive consequences”. Some companies, or sectors of the economy, will thrive due to injections of cash from central banks and others will not.
With central banks now picking winners and losers, citizens should legitimately ask what criteria they use to do so, and call on bankers to establish responsible investing standards that contribute to a greater social good. This is already happening, as government leaders call on central banks to support national security by preventing terrorists and criminal syndicates from accessing banking systems, for example.
Likewise, social movements are calling for green quantitative easing, or "Green QE" — asking central banks to purchase the stocks and bonds of companies that have strong environmental standards or are developing technologies that will support national goals to reduce greenhouse gases.
Central banks themselves have signaled an understanding of their social and political roles beyond fighting inflation. The European Central Bank’s promotion of a common currency and coordination of banks throughout Europe signals support for the political objective of European integration, for example.
So, if central bankers are already supporting non-economic policy goals like national security, climate action and regional integration, what other priorities might we expect them to support?
Broadly speaking, central banks need to more fully embrace their unique role as guardians of the future — to think about markets and their impact from an intergenerational perspective. This means making investment decisions in the interest of future generations, not just responding to emerging market dynamics.
In sync with this new global imperative, central bankers could prioritize portfolio purchases and regulatory policies in a number of areas:
- Climate change: There is perhaps no greater obligation to future generations than to ensure the sustainability of the planet. Central banks should therefore take into account national commitments to reduce greenhouse gases, for example, and invest first in green companies. An intergenerational perspective also requires planning for how long-term climate change will impact the global economy. The Federal Reserve has just joined a network of financial regulators focused on preparing the global financial system for climate change and risk, but climate change is still something of a side project and afterthought in mainstream central banking. What if securing the planet for the next generations were just as important a goal for central banks as keeping interest rates low over the next five to ten years?
- Youth employment and opportunities: Unlike some other central banks, the Federal Reserve has an official mandate from Congress to pay attention to the impact of monetary policy on employment. Yet again, there is an opportunity to interpret this mandate through an intergenerational lens. As our societies age and older people occupy higher status jobs longer, the opportunities for the young dwindle. Young people in many societies around the world do not believe they will have as many opportunities as their parents did. As guardians of the future, central banks should focus especially on youth employment and could do this by investing their substantial research operations on youth employment and taking youth employment opportunities into account in both monetary policy-making and regulatory work. This could range from investing in businesses owned or managed by young people or that prioritize youth employment to working with the banking industry and the government to create new opportunities for students and young entrepreneurs to access credit.
- Long-term peace and security: Central banks promote short-term national security interests by coordinating globally to track money laundering and boycotting the economies of countries identified as state sponsors of terrorism. But as guardians of the future, central bankers are also uniquely positioned to think about long-term peace and security, for the next generation. One way to do this is through coordination and collaboration across national borders. Another way is to align asset purchases with international law by investing in companies whose business practices comply with international legal obligations. For example, central banks might support the new U.N. ban on nuclear weapons, which requires nations to commit not to “assist, encourage, or induce in any way” the development or testing of nuclear weapons, by choosing not to buy or hold securities from companies that make nuclear weapons.
By more fully embracing an intergenerational perspective, central bankers can significantly contribute to the long-term sustainability of our economies and societies and fulfill the promise of their role as independent guardians of the future.
Annelise Riles is the associate provost for Global Affairs and a professor of law and anthropology at Northwestern University. Her book, “Financial Citizenship: Experts, Publics, and the Politics of Central Banking,” discusses the role played by central bankers in today’s world.