To hear it from bulls, the newborn year already belongs to central banks. Reviled not long ago for letting prices surge, Federal Reserve Chair Jerome Powell and his peers have been anointed by traders as saviors of the world. Those clapping the loudest probably don’t know how right they are.
The widely predicted global recession has yet to occur, inflation is coming down quickly, and interest-rate cuts are projected. As welcome as this development is, don’t imagine for a second that the lords of finance are going into repose. It’s never mission accomplished. Central banks will occupy an ever-more important position in the economic and security life of nations, if history is any guide.
The 2008 subprime fiasco, the euro debt crisis, and the peak phase of the Covid-19 pandemic are merely recent examples of muscular central banks making the difference. In Asia, the coming years are replete with potential tests of how well the political class can manage without monetary backstops: Will Jakarta push Bank Indonesia to once again directly finance the budget? How will Japan, which for decades has enjoyed ultra-cheap money, pay for a dramatic increase in defense spending? Bank Negara Malaysia was even in the airline business in the 1990s.
Far more broadly, a recent paper by Will Bateman, an associate professor at the Australian National University, describes how Powell’s predecessors stood behind fiscal policy at critical junctures and, as a result, facilitated broader objectives. Rates were effectively pegged at low levels during World War II, and a generation earlier, the Fed effectively underwrote President Woodrow Wilson’s wartime spending. Concerned about German territorial ambitions in the Caribbean, the US bought the Danish West Indies — later the US Virgin Islands — from Denmark in 1917. Without an injection from the Fed into Treasury, the purchase would have foundered.
In 1958, Dwight Eisenhower dispatched troops to Lebanon to assist in quelling an uprising the White House asserted was fomented by the Soviet Union and Gamal Abdel Nasser, the Egyptian leader regarded as a leftist troublemaker. Investors, worried about a wider conflagration with Moscow, became skittish and a Treasury refinancing operation faced collapse without the direct intervention of the Fed, wrote Bateman. Following Richard Nixon’s invasion of Cambodia in 1970, the Fed was required to rescue another refinancing.
Whether the outcomes brought about were successes or failures, the Fed was crucial to US leadership. Such actions needn’t be considered taboo, no matter how wary the current crop of central bank leaders is of being seen to venture off their turf.
History suggests central banks ought to be seen as geopolitical assets, Bateman said in an interview. “You can’t do any form of major military investment, any form of major currency control, import-export control, any kind of food security program, supply-chain protection program, social insurance,” in their absence, he told me. “You can’t do any of these geo-economic policies without a stabilizing mechanism, which is the monetary authority. You just can’t do it without this financial intermediary between a treasury and private creditors.”
The Fed sets the pace, but it isn’t alone. European Central Bank President Christine Lagarde has tried to develop a policy framework for an age of heightened competition between the US and China. In an April speech at the Council on Foreign Relations, she warned that a fragmented global economy and fractured supply chains required a new approach to policymaking. Geopolitical splits called for greater cohesion among arms of government. Lagarde was careful not to call for a marriage of fiscal and monetary policy. She cast the challenge as one of interdependence.
It’s hard to look beyond the immediate issues in front of us. And central banks have, by and large, stuck to their knitting since the spike in prices required dedication to quashing inflation and little else. Anything that could be attacked as mission creep was kept under wraps. The Fed even went so far last January to declare it wasn’t in the business of making climate policy. Powell may have wanted to avoid giving the new hard-right Republican majority in the House of Representatives red meat to chew on. But only a few years ago, the Fed was riding to the rescue as the global economy shuttered in response to Covid, with a host of radical measures often described as unprecedented. While that may have been true in a narrow sense, it was in some ways a return to a more historical role of assisting fiscal authorities to accomplish national goals.
If you are anxious about the prospects of prolonged conflict in the Middle East, Ukraine, or elections in consequential nations going wrong, you might sleep a little better to know that history is full of examples of money chiefs doing whatever it takes, to use Mario’s Draghi’s famous phrase. Dull, econometric stuff, this isn’t. Time for these agents of statecraft to come in from the cold.