This is my pet topic since the purpose of my co-authored book, ‘The Rise of Finance’ was to highlight how Finance has taken over the economy and how central banks have actively facilitated it.
Recently, I came across Ann Petitfor’s article in ‘Project Syndicate’ from the Global Daily of the Rabobank (22nd September 2021). From her article, I came across an article by Benjamin Braun. This is a very provocative extract:
The question is: What strategic vision guides how technocrats wield this formidable instrument of sovereign power? Who or what are central banks planning for?
The answer is, of course, the private financial system. And rather than a decentralized system coordinated by market prices, private finance itself has come increasingly to resemble a centrally planned system: global investment priorities are a function not of the decisions of millions of Hayekian speculators but of the business models of a few dozen, extremely large banks and asset managers. Banks invest in mortgages; asset managers in whichever firms are in market-capitalization-weighted indices; private equity firms in urban real estate; and venture capital firms in scalable rent-extraction models. This sector is highly concentrated at the top, where a few giant companies — banks, hedge funds, private equity funds — exercise considerable control over the direction of global capital flows. They are, in effect, the central planners of the wealth-owning class.
Rather than providing a corrective to the inefficiencies and inequities of this mode of capital allocation, central bank planning has long been geared towards expanding and stabilizing it. The 2008 financial crisis did not change this pattern of central bank-led financialization. The shadow bank system will not establish sufficiently liquid and standardized, pan-European repo or securitization markets on its own? The European Central Bank will help. The private system of securities settlement is inefficient and creates frictions in capital markets? The ECB will build a better, publicly operated system. Asset markets regularly seize up, threatening the expansion of the financial sector? Central banks will create backstops and dealer-of-last-resort facilities, thus effectively underwriting the ability of hedge and private equity funds to gobble up assets amidst economic disasters.
The upshot is that while central bank planning already exists, it is currently geared towards propping up a system in which the planning of investment is actually done by the private financial sector. This system is both deeply unjust and inefficient. Central banks have become the lenders of last resort for a manifestly unsustainable status quo.
I don’t know if his solutions would solve the problem or create fresh ones. But, that is how the world will keep swinging wildly from one extreme to the other.
As the Rabobank’s Daily (22nd September 2021) mentions, in capitalism, it is ‘man eats man’; in communism, it is the reverse.
Ann Petitfor’s article has some interesting extracts too:
Meanwhile, the Bank for International Settlements has tallied up the value of the extraordinary fiscal, monetary, and macroprudential measures that central banks have deployed since 2007 to shore up private financial markets and mitigate their adverse economic impacts. Notably, BIS economists find that central-bank programs to purchase private assets accounted for half of total purchases over this period. And as other researchers have shown, a significant share of these financial flows have gone to support fossil fuels and other carbon-intensive sectors….
… Given the precarious state of the biosphere, it is imperative that central banks’ activities be reoriented toward what Braun calls “public purpose,” and away from the task of sustaining private gains in capital markets….
….If we are going to avert both a political and a climate breakdown, we will need to transform the international monetary system so that it upholds democracy and the policy autonomy of nation-states. That means reintroducing capital controls, re-regulating global banking, re-nationalizing pensions, and restoring political and economic power to elected assemblies – not simply to their executives and to central bankers.
In the meantime, a former central banker flagged an interesting paper by Thomas Palley on the political economy of financialisation. I am yet to read it. You can find it here.