In little more than a decade, the global financial crisis, climate change, and the COVID-19 pandemic have transformed the environment in which central banks operate – and public opinion is not on their side. Monetary policymakers who fail to respond to these shifts in sentiment will see their reputations suffer.
ZURICH – In Golden Fetters, his celebrated study of the collapse of the gold standard in the interwar period, the American economic historian Barry Eichengreen emphasized that important political and social changes, in particular the extension of the franchise, had made it impossible to maintain the system. Electorates were no longer willing to endure austerity if sticking to the gold standard required it.
The prevailing monetary-policy regime was swept away in the new political landscape. Some countries, such as the United States and the United Kingdom, were quick to adjust to the new realities, and their economies did well. Others, such as France and Switzerland, were slow to respond and suffered the consequences.
Central banks are now approaching a new “golden fetters” moment. In little more than a decade, the global financial crisis, climate change, and the COVID-19 pandemic have transformed the environment in which they operate – and public opinion is not on their side.
Two changes in sentiment are especially apparent. First, there is broad agreement among the public that global warming is real and that environmental degradation is a grave threat. Many believe that governments – including central banks – must do all they can to tackle these problems.
Second, central banks’ responses to the financial crisis and the pandemic have triggered a huge increase in wealth inequality. By lowering policy rates to zero or below and purchasing massive quantities of government bonds, central bankers have forced down interest rates along the yield curve to unprecedentedly low levels. In some countries, notably Germany, yields on all government-debt maturities have fallen below zero.
Although these measures have been essential to giving the economy a sorely needed boost, they have done so by increasing the prices of practically all assets, including stocks, bonds, and residential real estate. That is how monetary policy works. But a large part of the public finds it grossly unfair that while many have suffered unemployment and economic hardship as a result of these two crises, asset owners have gained outsize benefits.
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Some monetary policymakers have argued that, regardless of the shifts in public sentiment, their mandates provide them with little justification for addressing inequality and environmental threats. And, in any case, they assert, the tools at their disposal cannot deal with these problems effectively. These arguments no doubt contain a grain of truth, but many people find them unimaginative and unconvincing.
European Central Bank President Christine Lagarde has taken the lead in confronting the new reality by pushing for climate change to be included in a strategic review of the ECB’s monetary-policy framework. That review may conclude that the ECB should take environmental considerations into account when deciding which assets to accept as collateral for its monetary operations, and how it should value them.
European banking regulators may then lower capital charges on “green” assets or increase them on “brown” ones, on the grounds that current regulations underestimate the riskiness of climate-unfriendly holdings.
Overall, central banks and financial regulators seem to have several ways to incorporate environmental concerns into their policy frameworks if they so wish. And because the ECB is required to “support the general economic policies in the Union,” of which limiting climate change is one, it would seem to stand on firm legal ground in that regard. Importantly, central banks recognize that they can promote the greening of the economy without losing sight of their primary monetary-policy and financial-stability objectives.
The US Federal Reserve recently added to this momentum by becoming the first major central bank to incorporate inequality considerations into its policy framework. In announcing the outcome of the Fed’s monetary-policy strategy review last month, Fed Chair Jerome Powell emphasized that America’s black and Hispanic communities had also benefited from tight labor markets before COVID-19 struck.
Powell went on to say that the Fed will target only the shortfall of employment from its maximum level when setting policy, and worry less about situations when employment exceeds estimates of its peak sustainable level. This reflects the increasingly widespread view that very low unemployment rates are unlikely to trigger inflation, and would greatly benefit low- and moderate-income households.
With the ECB worrying about environmental risks and the Fed concerned about minorities’ prospects in the labor market, it is clear that times are changing for central banks. Other monetary policymakers will follow their lead, and those that fail to see the need or are slow to react will suffer reputational damage as a result.
Today’s central bankers would do well to heed the advice of the last president of the Soviet Union, Mikhail Gorbachev. When Gorbachev met East Germany’s communist leaders in Berlin in October 1989, he warned them that those who act too late will be punished by life. A month later, his hosts, and their regime, were swept away.
With German voters clearly demanding comprehensive change, the far right has been capitalizing on the public's discontent and benefiting from broader global political trends. If the country's democratic parties cannot deliver, they may soon find that they are no longer the mainstream.
explains why the outcome may decide whether the political “firewall” against the far right can hold.
The Russian and (now) American vision of "peace" in Ukraine would be no peace at all. The immediate task for Europe is not only to navigate Donald’s Trump unilateral pursuit of a settlement, but also to ensure that any deal does not increase the likelihood of an even wider war.
sees a Korea-style armistice with security guarantees as the only viable option in Ukraine.
Rather than engage in lengthy discussions to pry concessions from Russia, US President Donald Trump seems committed to giving the Kremlin whatever it wants to end the Ukraine war. But rewarding the aggressor and punishing the victim would amount to setting the stage for the next war.
warns that by punishing the victim, the US is setting up Europe for another war.
Within his first month back in the White House, Donald Trump has upended US foreign policy and launched an all-out assault on the country’s constitutional order. With US institutions bowing or buckling as the administration takes executive power to unprecedented extremes, the establishment of an authoritarian regime cannot be ruled out.
The rapid advance of AI might create the illusion that we have created a form of algorithmic intelligence capable of understanding us as deeply as we understand one another. But these systems will always lack the essential qualities of human intelligence.
explains why even cutting-edge innovations are not immune to the world’s inherent unpredictability.
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ZURICH – In Golden Fetters, his celebrated study of the collapse of the gold standard in the interwar period, the American economic historian Barry Eichengreen emphasized that important political and social changes, in particular the extension of the franchise, had made it impossible to maintain the system. Electorates were no longer willing to endure austerity if sticking to the gold standard required it.
The prevailing monetary-policy regime was swept away in the new political landscape. Some countries, such as the United States and the United Kingdom, were quick to adjust to the new realities, and their economies did well. Others, such as France and Switzerland, were slow to respond and suffered the consequences.
Central banks are now approaching a new “golden fetters” moment. In little more than a decade, the global financial crisis, climate change, and the COVID-19 pandemic have transformed the environment in which they operate – and public opinion is not on their side.
Two changes in sentiment are especially apparent. First, there is broad agreement among the public that global warming is real and that environmental degradation is a grave threat. Many believe that governments – including central banks – must do all they can to tackle these problems.
Second, central banks’ responses to the financial crisis and the pandemic have triggered a huge increase in wealth inequality. By lowering policy rates to zero or below and purchasing massive quantities of government bonds, central bankers have forced down interest rates along the yield curve to unprecedentedly low levels. In some countries, notably Germany, yields on all government-debt maturities have fallen below zero.
Although these measures have been essential to giving the economy a sorely needed boost, they have done so by increasing the prices of practically all assets, including stocks, bonds, and residential real estate. That is how monetary policy works. But a large part of the public finds it grossly unfair that while many have suffered unemployment and economic hardship as a result of these two crises, asset owners have gained outsize benefits.
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At a time of escalating global turmoil, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided.
Subscribe to Digital or Digital Plus now to secure your discount.
Subscribe Now
Some monetary policymakers have argued that, regardless of the shifts in public sentiment, their mandates provide them with little justification for addressing inequality and environmental threats. And, in any case, they assert, the tools at their disposal cannot deal with these problems effectively. These arguments no doubt contain a grain of truth, but many people find them unimaginative and unconvincing.
European Central Bank President Christine Lagarde has taken the lead in confronting the new reality by pushing for climate change to be included in a strategic review of the ECB’s monetary-policy framework. That review may conclude that the ECB should take environmental considerations into account when deciding which assets to accept as collateral for its monetary operations, and how it should value them.
European banking regulators may then lower capital charges on “green” assets or increase them on “brown” ones, on the grounds that current regulations underestimate the riskiness of climate-unfriendly holdings.
Overall, central banks and financial regulators seem to have several ways to incorporate environmental concerns into their policy frameworks if they so wish. And because the ECB is required to “support the general economic policies in the Union,” of which limiting climate change is one, it would seem to stand on firm legal ground in that regard. Importantly, central banks recognize that they can promote the greening of the economy without losing sight of their primary monetary-policy and financial-stability objectives.
The US Federal Reserve recently added to this momentum by becoming the first major central bank to incorporate inequality considerations into its policy framework. In announcing the outcome of the Fed’s monetary-policy strategy review last month, Fed Chair Jerome Powell emphasized that America’s black and Hispanic communities had also benefited from tight labor markets before COVID-19 struck.
Powell went on to say that the Fed will target only the shortfall of employment from its maximum level when setting policy, and worry less about situations when employment exceeds estimates of its peak sustainable level. This reflects the increasingly widespread view that very low unemployment rates are unlikely to trigger inflation, and would greatly benefit low- and moderate-income households.
With the ECB worrying about environmental risks and the Fed concerned about minorities’ prospects in the labor market, it is clear that times are changing for central banks. Other monetary policymakers will follow their lead, and those that fail to see the need or are slow to react will suffer reputational damage as a result.
Today’s central bankers would do well to heed the advice of the last president of the Soviet Union, Mikhail Gorbachev. When Gorbachev met East Germany’s communist leaders in Berlin in October 1989, he warned them that those who act too late will be punished by life. A month later, his hosts, and their regime, were swept away.