Central banks are rarely discussed until booms turn to busts. Like many others, politicians turn on central bankers in ignorant blame, particularly when central bank (CB) messages are unattractive. The LNP detests the Reserve Bank of Australia’s urging that it fosters higher wages and engages in long-term investment. But what can CBs actually do?
Their role is ‘only’ as bankers to governments and to banks which are both far more powerful and often disruptive. Central bank duties are to maintain ‘price stability’, an anodyne term that means preventing inflations or deflations of money’s value. The RBA and the US Fed is bolstered in its deflation-prevention role with a second duty of ‘full employment’. Yet CBs can only raise or reduce the rate at which it lends to banks and governments. They cannot ‘create’ full employment or raise deflating wages, nor prevent asset or bank-money inflations: tasks for governments, unions and private banks.
Heedless, Trump recently called the US Federal Reserve ‘boneheaded’; Morrison and Frydenberg criticised the RBA for not ‘reaching’ its (wage) inflation target. Governments seem to want bubbles regardless of forty years of anti-(wage) inflation regimes. Neither Trump nor Morrison favour ‘red tape’ that might nudge private banks towards some socially useful investment. For the RBA, high household debt is the current concern, but low rates are not tempting the LNP to spend up, nor private banks to change their inflationary speculative ways.
Anyone informed about a ‘surplus’ knows that removing state-money is only relevant for private boom-bubble times, not the LNP’s austerity. When there were few democratic processes, austerity ruled unchecked. The earliest central banks were founded by autocratic, warmongering states and financial blocs, perfectly content to inflict misery through depressions. This rule book returns under hard-right politicians and bankers, however, CBs’ duties slowly changed with expanded voting rights. Social democratic governments in 1929 tried to stave off vicious finance sectors, but it was only after the Great Depression that moderate governments introduced reforms.
F.D. Roosevelt was influential via curbing Wall Street banks and refocusing the Fed. Long before, France, Japan, Spain and Germany imposed central bank aims for industrial expansion, also benefiting labour. In contrast, the Bank of England and the 1913 Fed were to boost financial sectors and preserve the pound or dollar value by imposing bone crushers in the 1920s. CBs’ reputations sank, but financial sectors were the culprits, also vicious governments (like ‘hunger’ Chancellor Brüning before 1933).
In contrast, the Bank of Canada and RBA were founded from social democratic motives, earliest under Australian Labor governments. Reforms across the world in the 1930s to postwar brought welcome relief from booms to ugly busts. The RBA, previously wartime CBA, was first with a full employment (FE) remit, finally in 1978 the Fed. Why is FE important?
Up to the 1930s, CBs could easily induce debt-deflation, so the subsequent twin aims of price stability with FE were ideal for preventing recessions. It was well-known, then, that CBs can never generate employment via low Rates. Even colonial NSW turned to stimulus on hospitals and schools – the ‘multiplier’- whenever Britain withdrew pound sterling due to its own mess. Government taxes under PM John Curtin were to be progressive to rein in speculation and bubbles of asset inflation and WWII inflations.
All that changed with Nixon’s presidency. Vietnam war finance was (price) inflationary, US workers were at last on fairer wages, but Wall Street had gone ‘global’. A ‘revenge of the rentiers’ (banks) set in; postwar deals were broken, and the US Fed damned employment, under Arthur Burns, 1970s, then Paul Volcker. The Chicago school played a nefarious publicising role: Milton Friedman tried to impose ‘monetarism’, only succeeding via his battle against wages (cast, wrongly, as NAIRU’s sole ‘inflation’). The Fed Rate stayed high, not that postwar CBs allowed rapid inflations either, my central banks book shows: see.
Private banks developed in strength and glamour, but crises returned, hitting heartlands in the 2007 Great Financial Crisis. Suddenly inflation was no longer the 1980-90s ‘enemy’, via which governments had imposed on CBs ‘Inflation Targets’. They also removed regulations and supervision from CBs (self-financing), with Treasurer Costello a fanatic. Yet the Bank of Canada and RBA were least interested in ‘Targets’, because lengthy high Rates to reduce wages created terrifying unemployment levels. Compare Europe and Britain, where high Rates against former fiscal policies that served the public turned into 1930s-type austerity (lucrative for banks).
Today’s situation infuriates right-wing governments. CBs can never get up to the inflation ‘Target’, and they refuse to damage their reputations (again). CBs are not dependent on state largesse: their profits go to a sole ‘shareholder’, the state (less bank-owned US District Feds). CBs tried to temper pork-barrelling governments (like Menzies’, using the 1945 Reserve Bank Act), but prefer obscurity these days to ward off neoclassical attacks.
Far-right politicians and banks loathe unions – Friedman’s real target – yet unions are the democratic source to demand the higher wages that many CBs urge. Furthermore, these governments reject social justice and, to maintain electoral ‘popularity’, spend on war finance and divisive tax perks.
Treasurer Frydenberg now wants banks to pass on the RBA’s rates cuts. Fake frothing skates over the dire need for state controls over the purposes of lending. Asset bubbles grow because banks are licenced to create money for ‘anything’, but they can only do that together. Loans are deposited in other banks, in chains of bank-money creation, bolstered by banks’ own interbank overnight lending rates (for example, LIBOR, set or manipulated in London).
As a rule, CBs also lend to banks because they buy/sell government securities continuously. QE is merely a massive extension (allegedly to boost ‘business confidence’), but beloved by financial traders for quick speculative profits. The RBA long rejected QE. In my view, another housing investor bubble, also care of generous tax treatment, is the last thing Australia needs. For wage rises or regenerative social and ecological investments, central banks, knowledgeable civil servants, can only jawbone.
Jocelyn Pixley is an Honorary Professor in Sociology, Macquarie University