Harry Geels: Central bankers, the uncrowned kings of the system

May 28, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

Our current system is neither capitalist nor communist, but a mixture of private companies, government and central bank. The last two have taken on an increasingly dominant role, the central bank even without a clear democratic mandate. One picture can show how bizarrely diffuse the system has become.

There is currently a lot of discussion in the media about a necessary system change. The current system is believed to be insufficient because, for example, it is believed to have greatly increased inequality and damaged our planet too much. The discussion almost always pits public markets against private markets, which is actually nothing more than the well-known political struggle of ideologies, for example that between neo-liberalism and socialism, or capitalism and communism.

That contradiction is far too simple. Over the last century, central banks have emerged as an increasingly dominant player in both public and private markets. Or at least, what's left of it. In fact, nowadays we no longer have a crisis without intervention of central banks, although it is often left undiscussed that central banks have always played an important role in causing crises due to their dominance. Let's unravel the current system into a model.

Seven different types of markets

Figure 1 shows three main markets: private, public and monetary, and four overlapping markets. The private market speaks for itself. Companies can operate autonomously here, provided they comply with the laws and regulations, although government intervention is not far away, for example through subsidies. On the public market, the government regulates almost everything, such as the police, army, healthcare and education. On the monetary markets, central banks maintain the monetary system and the monetary supply and a balance sheet with public and private assets (and liabilities).

Figure 1: The economic system in most countries in the world

The special thing about central banks is that they operate like a company, but cannot go bankrupt. Last year, the major central banks suffered mega losses on depreciated bonds purchased as part of QE. That is possible, simply no dividend is paid out. They also operate on the private markets, for example by purchasing bonds (sometimes even shares and ETFs) of large companies, steering economic growth and providing forward guidance to the financial markets.

Central banks are also closely linked to governments – through fiscal-monetary coordination. (Indirect) monetary financing of governments takes place regularly. Newly issued government bonds are purchased through the banking system - prohibited in the EU treaty, for example, but the ECB gets away with it. Another overlapping market concerns hybrid companies, 'private' organizations in which the government may or may not be a full shareholder, such as ABN AMRO, Schiphol and TenneT in the Netherlands.

The commercial banks are located at the intersection of the three markets. These, at least the system banks, cannot fail either. They are supported both monetaryly and fiscally (in case of bank bail-outs). They fulfill the gatekeeping function (actually a public task) and are allowed to create money (actually with the help of a publicly obtained privilege), thereby reinforcing the economic cycle up and down. And they also determine what and who can borrow money, thereby influencing the relationship between haves and have-nots.

A socialist system with an undemocratic central bank

From the design of our current economic system described above, it can be deduced that private markets are only part of the bigger picture. Looking at the contribution to GDP, the government is just as important as the business community. In this respect, our system is actually socialist rather than capitalist.

The second observation is the enormous influence of central banks on the system. They are legally special organizations. Not only because they cannot go bankrupt, but also because they can make their own policy independently of the government. Central banks can go directly against the vote of the citizen.

They are involved in both private and public markets. Central banks, among other things, control the financial markets with their purchasing and interest rate policies. Monetary policy is furthermore political. Inflation policy, for example, is income policy (because inflation affects lower incomes more than higher ones). And the inflation target of 2% implies that the economy must grow (the policy is therefore politically against Degrowth). Adam Smith's 'invisible hand' has been replaced by the 'monetary hand' due to the rise of central banks.

Debate about mandate

The increasing influence of central banks requires attention. In Europe, the ECB is becoming increasingly involved in matters such as digital currencies and the climate transition. Undoubtedly with good intentions, but some mental flexibility is needed to fit this within the mandate. It is high time for a debate on the mandate of central banks. My position is that this should be as limited as possible (in short: keep the money supply in line with economic growth as much as possible).

And if the mandate is to be as broad as it is now, it must be better embedded democratically, for example through transparent appointment procedures for central bankers and by passing the final mandate through the voter. Oh, and please stop calling our system capitalist. The use, or rather misuse, of this term betrays a political agenda. The current system has become a mixture of governments, central banks and increasingly larger companies, where we know less and less who is pulling the strings and where.

This article contains a personal opinion from Harry Geels

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