Central banks can’t ignore the big issues at Jackson Hole

Although there is a growing consensus that central banks have a key part to play in tackling major social issues like the climate crisis, the tired argument that they risk losing their independence in doing so found its way back into the news this week in a Bloomberg opinion piece by former Bank of England governor Mervyn King.

King and his co-author Dan Katz fail to grasp that monetary and financial authorities are fundamentally political animals with political tools that have fueled social and environmental breakdown. Burying their heads in the sand as the chickens come home to roost is not a viable option. With the Jackson Hole Economic Symposium (known as the “Davos” of central banking) approaching, central bank heads have an opportunity to place the most pressing social issues at the top of the agenda.

Racial injustice, inequality, climate change and ecological collapse are all fundamentally interconnected and inseparable issues. In a vicious cycle undermining the stability of our society and our planet, spiraling inequality both drives and is exacerbated by the climate and ecological crises. While a wealthy elite in the Global North bear the vast majority of responsibility for the unprecedented heatwaves, fires, floods, droughts, and extinctions we’re seeing across the globe, the most vulnerable in our societies, especially in the Global South, bear the brunt of these rapidly intensifying impacts.

In making decisions that affect where money flows in our society, central banks can reinforce or counteract these dynamics. And equally, soaring inequality and environmental breakdown are major sources of financial risk, threatening central banks’ core objectives – most commonly of price and financial stability.

As central banks expanded their toolkits following the financial crisis and again in response to the Covid-19 pandemic – all in a desperate effort to rescue a fundamentally flailing and rigged economic system – their impact on inequality and environmental issues became clearer than ever. Amongst the clearest examples is the corporate debt bought by central banks as part of their Quantitative Easing programmes, which has been disproportionately skewed towards carbon-intensive companies. But many other areas of both monetary and financial policy also involve profoundly political decisions.

King and Katz cite lack of expertise, as well as radical uncertainty, as justifications for central banks to steer clear of major social issues. But these are instead important reasons for central banks to expand their capacity, collaborate with other experts and government departments, and take swift precautionary action. As climate-related financial risks are indeed characterised by radical uncertainty and will have catastrophic and irreversible consequences, proactively intervening in financial markets is the only responsible approach for central bankers seeking to fulfil their mandates and secure a liveable and just planet for current and future generations.

‘Independence’ is not at risk, because it’s a myth to begin with. Central banks’ objectives are defined by elected officials, who also appoint senior monetary and financial policymakers. Operational independence means that central banks decide for the most part how they will go about achieving their goals, but the goals themselves have never been set by independent authorities. If anything, central bank operations should be more democratically informed and politically accountable, not less.

The irony of King’s concerns about independence from government is that central banks are by no means independent from private financial interests, which is the real area of concern if central banks are to make decisions in the public interest. In the globally interconnected and privatised financial system, monetary and financial policy outcomes are significantly shaped by the influences and actions of private financial institutions, as well as other central banks in the system. Not only is there a well frequented revolving door between senior central banking positions and private financial institutions, successful implementation of their policies depends entirely on financial markets dominated by profit-maximising institutions that don’t have the public’s best interests at heart.

The profound economic transformation we need to achieve a fair, sustainable, and democratic economy must be led by fiscal, industrial, and environmental authorities. But central banks don’t operate in a vacuum, and their toolkits can either hinder or support the broad change we need, as well their narrow core objectives. There can be no price stability, no financial stability, and no job security on a burning planet in social turmoil. At Jackson Hole, central banks must face this reality.