Central banks were the first economic responses to the Covid-19 pandemic. From Washington to Wellington, policymakers quickly deployed tools developed during the global financial crisis and found new ways to strengthen the credit markets essential to the functioning of modern commerce.
Learning from the fiasco of 2007-2009, they moved with great speed and scale. Monetary authorities were aided by their independence: they had credibility with investors and businesses, which enabled them to take bold action and were not subjected to the political haggling and delays that typically accompany policy measures. fiscal stimulus. But some lessons may have been taken too far. Are central banks carrying too much weight and shaping policy too broadly in too many areas? If so, does this jeopardize the very autonomy that makes them so effective? Christina Parajon Skinner, assistant professor at the Wharton School at the University of Pennsylvania and former legal adviser to the Bank of England, examines these issues in detail in her article “Central Bank Activism,” which is expected to be published next month in the Bank of England. Duke Law Journal.
I spoke with Skinner about how the Fed has used the enormous power at its disposal – and the potential costs of such a muscular role – especially in light of the current White House deliberations on whether to appoint Federal Reserve Chairman Jerome Powell for a second term. (Fans say Powell did a good job in a once-in-a-lifetime crisis, while most critics claim he was too easy on the banks and not attentive enough to environmental concerns. There are also vacancies coming up for the positions of Vice President of the Fed and Vice President for Oversight.) The transcript has been edited for length and clarity.
DM: A barrage of emergency measures has been called twice in 12 years. Can they still be called unconventional and what is the likelihood that central banks will take this route over and over again?
CPS: The door is open. There is now a strategy that has proven capable of achieving the goals for which it was intended: to stabilize the financial system and prevent a repeat of the Great Depression. I would not be at all surprised if, in the next crisis, these parts would be used again; similar programs are deployed. There is an ongoing discussion as to whether a number of these crisis centers should become permanent centers so that we have stronger criteria and accountability traps rooted in law or regulation.
An important point to note here is the Main Street Lending Program, which was an important but unprecedented thing that the Fed did in 2020. To be clear, it was not the Fed acting alone. Congress specifically requested and authorized the Fed to do so, but the Fed’s lending to this sector of the economy appeared to reverse some of the Federal Reserve Act revisions that previous Congresses had made.
The Federal Reserve Act authorized this kind of industrial lending role for the Fed. This was taken out of the law in 1957. It is not at all clear whether the Cares Law is a one-time authorization to lend to the real economy or if the Fed now has the power to reincarnate a version of it to the real economy. future for the purpose of helping small businesses or municipalities that experience losses due to some other economic, public health or even political event.
DM: Are mandates getting longer or is it the interpretation of mandates that are getting longer? Once something is stretched, can we go a little deeper and then a little deeper? How far do they go beyond the basic ideas envisioned by the designers of the central bank concept?
CPS: This is certainly the argument that proponents of what I call “central bank activism” would make. We have these laws written in general terms. You can put anything under that big tent. Ultimately, we have to fall back on the fundamental principles of the rule of law and the organization of a democratic society. Of course, we don’t want to over-strain the Fed. Congress wanted the Fed to do its basic historic work, especially its crisis-fighting role. But there must be limits. The Fed’s tenure cannot be stretched by the company putting new demands on the Fed, or components of the company putting pressure on the Fed to solve all of the economic problems of the day. This is not the role of the Fed.
Harnessing the language of the Federal Reserve Act for various purposes that takes the Fed outside of its legal and historical role is where we really need to stop and think about it. Just because there’s a big problem on the horizon doesn’t mean it’s a job for the Fed. Where do you draw the line? Trade, immigration, relationship issues with China, to name a few? The Fed can’t do all of these things, not just because it doesn’t have the legal authority but because it doesn’t have the resources.
Ultimately, this is a big question that American society must grapple with. I don’t think this country has much of an appetite for central planning by central banks. Do we want a central bank Leviathan? I think a lot of people would answer that question “no”.
DM: Of course, there are advantages to Congress saying “go this far and no further”. But Congress is not exactly known for its political courage. Isn’t it more practical to let the Fed do these things? Central banks can act quickly. What the hell is wrong with that?
CPS: I am often asked questions about traffic jams. In a world where Congress cannot or does not want to act in a timely enough manner, should the Fed act alone, take matters into their own hands? I firmly say “no”. There are critical rule of law issues at stake in adhering to this vision of deadlock. Our agencies and our central bank are creatures of statutes, so they only have the powers that our elected officials give them. If the American people want the Fed to do something more, like proactively mitigating climate change, proactively reducing inequality, then they should look to their democratically representative institution to revise the Federal Reserve Act.
The risk of interpretations that push the boundaries is that they can erode the integrity of the institution. This will make people wonder if the independence of the Fed has been compromised. Is it responding to political pressure or to certain segments of society? How can we really know what the consensus of society is if we don’t go through our elected institutions? People will start to question the authority of the Fed. The Fed is a body of unelected technocrats who should not make value judgments about what issues to deal with in society, how to do it, with what resources, and at what pace.
DM: Does this explain why the Fed’s leadership roles have become so controversial? Alan Greenspan was almost elevated to the rank of a deity. In 2006, Ben Bernanke was confirmed by a voice vote in the Senate. Bernanke’s second vote in 2010 was much more difficult, as was Janet Yellen’s in 2014. Powell had an easier time in 2018, but he now has some top opponents. Do people realize that the best chance they have to influence policy is through the personnel?
CPS: It is a fair assessment and an unfortunate development. This reflects how embroiled the Fed is in these other issues that are outside of its technocratic monetary policy wheelhouse and what should be relatively objective regulatory decisions, like capital requirements, for example. We generally believe that the more subjective decisions about distribution or social policy lie with the legislature and the executive.
Fed appointments will potentially continue to become more controversial as those issues that fall outside the Fed’s mandate are ultimately polarizing issues. I did some empirical research with a coauthor on Americans’ views on whether the Fed should tackle other issues like climate change, inequality, and the answers more or less match the respondents’ confidence in the president or in the way they get their news (for example via social networks).
So if the Fed weighs in on these other areas – and that’s not a comment on the substantive importance of these issues – it will most likely exacerbate or contribute to polarization in the United States. the system of separate powers that is our constitution is designed around it.
DM: Is it too much to consider the Fed as a de facto state within a state?
CPS: People made this argument. I fire a warning shot from the front. The company has developed expectations that the Fed can do more than it legally can, or should, from a rule of law perspective. There is a risk that if we continue on this path we will end up with a Fed that we are not happy with because we will feel like we have created this Leviathan. It’s a risk. I think we are not there yet.