This chapter has endeavoured to situate the discussion of central bank power within existing debates over the delegation of power to non-majoritarian actors and the relative power of central banks vis-à-vis financial market actors. It has also aimed to provide the conceptual tools and theoretical foundations necessary for explaining the combination of convergence and divergence witnessed in the three jurisdictions considered in this thesis. Section 2.2 set out a range of economic and political explanations for the delegation of financial stability functions to central banks. Section 2.3 examined the different ways that business in general, and the financial industry in particular, exerts influence in public policy processes. Section 2.4 identified the three different core elements of central bank power – authority, structural power and capacity – that will be compared and contrasted in the empirical chapters to follow. Finally, Section 2.4 conceptualised the interaction between agents and institutions in processes of institutional change, highlighting the mechanisms by which cross-national convergence co-exists with new divergences and perpetual difference.
The unifying theme of this chapter has been that the ideas and intellectual fashions of central bankers and related experts in transnational networks matter a great deal to the power of central banks. As with the emergence and spread of CBI in the 1990s and 2000s, the prime impetus for the enhancement of central banks’ financial stability functions since the financial crisis has been the active advocacy of the transnational community of central bankers, international organisation staff and academic and private sector economists. These actors adopted macroprudential ideas as their new orthodoxy and persuaded policymakers of the importance of empowering central banks to implement new macroprudential policies. Central bankers’ ideas also play an important role in shaping their relationships with the financial industry. The structural power of the financial industry within policymaking processes is manifested only through the agency of the actors involved. Actors must interpret their respective claims and perspectives drawing on causal and normative beliefs that enhance or diminish their power. Finally, as the final part of this chapter has demonstrated, ideas are of course central to any process of institutional change.
In the remainder of this thesis, the analysis moves from the abstract to the empirical. Chapters 4-6 demonstrate how new ideas have been translated into local institutional contexts, transforming the power of central banks vis-à-vis both market actors and democratic authorities in the process. It is no exaggeration to say that the changes discussed herald the beginning a new era in central banking. While this may sound a grandiose claim, the post-crisis
103 transformations in central banking are merely the latest a long history of reinventions of central banking. It is to this history we now turn.
1 Building on a distinction first proposed by the philosopher John Searle, Rethel
and Sinclair (2012) distinguish between ‘regulative’ rules, which place limits on banks’ activities, and ‘constitutive’ rules, which define what banks are and what they do.
2 Many economists view the case for CBI in respect of monetary policy as
beyond question. As Blinder (2010:2) puts it ‘to economists, at least, that debate ended long ago.’
3 Haldane (2014: 3) summarises the time-inconsistency problem in monetary
policy as ‘the temptation to over-supply money or over-relax regulations today, often to finance wars or to win elections, at the expense of inflation tomorrow’. See Kydland and Prescott 1977 for the original statement of the time inconsistency problem in relation to monetary policy.
4 ‘Printing money’ eventually will drive up inflation expectations and interest
rates. After a certain point, this will drive down tax revenues and the demand for new base money.
5 This conflict has been readily apparent in the years since the onset of the
global financial crisis. A prolonged period of very low interest rates has stimulated a ‘search for yield’ in which institutional investors have bought riskier assets at knocked-down prices the hope of increasing or maintaining levels of return.
6 The work of Seabrooke and Tsingou (2009) on ‘linked professional ecologies’
provides a perspective on revolving doors that highlights processes of socialisation and learning rather than material incentives.
7 This view of power overcomes the problematic assumption of ‘false
consciousness’, which is implicit in Luke’s third dimension of power (Hay 1997; 2002: 179).
8 The concept of deference is preferred to compliance because the central
banks considered in this thesis are situated in advanced industrial economies where the rule of law is well established. On the whole, these central banks can expect financial market participants to ‘comply’ with their rules as a matter of course, since those rules are generally legally binding and enforceable.
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3
FINANCIAL STABILITY AND CENTRAL BANK POWER BEFORE 2008
3.1 INTRODUCTION
The origins of the three central banks discussed in this thesis could hardly be more different. The Bank of England was established in 1694 and is the second
oldest central bank in the world, after the Swedish Riksbank (established in
1668). Created initially as a mechanism for funding England’s wars against
France, it was not until the 19th century that it accumulated most of the
financial market functions that are the essential features of a modern central bank. The Federal Reserve was established in 1913, a date by which most other industrialised countries had long-since established their central banks. Unlike the Bank of England, it was created specifically out of concerns over financial stability. Its founders were motivated to equip the chronically crisis-prone US banking system with a lender of last resort (LOLR). The European Central Bank (ECB) was formally established in 1998. Its origins lie in the federalist ambitions of an elite group of political leaders concerned with cementing the unification of Europe through the creation of a common currency. Banking and financial stability were not the primary preoccupations of the forefathers of either the ECB or the euro; the scramble to reform the architecture of EU-level financial regulation and supervision since 2008 attests to this.
In order to evaluate how the power of the Federal Reserve, the Bank of
England and the ECB has changed since the onset of the financial crisis, it is necessary to appreciate how their power developed and evolved in the pre- crisis era. This chapter provides this contextualisation. The chapter starts from
the premise that notwithstanding important variations in the size, scope and functions of these and other central banks, the institution of central banking (in general) has been through a number of distinct macro-historical phases. Central banks’ influence in economic policy debates, their ability to chart an independent course of policy in line with their own preferences, and their capacity to facilitate favourable macroeconomic and financial outcomes, has waxed and waned at different moments in the history of central banking. These changes have followed macro-historical events, including the impact of the World Wars and the Great Depression. Transformations in central banking have also reflected broad structural changes in the global economy, such as the growth of international capital mobility, technological change and the geographic expansion of international markets for goods and labour in the latter part of the 20th Century. More proximately, the changing power of central banks has reflected changing economic theories and intellectual fashions amongst central bankers, politicians and market participants. Ultimately, these ideational factors matter because ‘structures do not come with an instruction sheet’ (Blyth 2002). In other words, intellectual fads and fashions influence how actors produce and reproduce structures through time and space (Giddens 1984: 374).
In the two decades preceding the financial crisis, central banks around the world exhibited a considerable degree of convergence. This was most apparent in the widespread adoption of central bank independence (CBI) as an organisational model for central bank governance (McNamara 2002; Marcussen 2005). Other elements of convergence included the advent in many countries of
107 inflation targeting as the primary organising principle for monetary policy (Begg 2009) and a shift towards ostensibly apolitical, ‘quasi-scientific’, modes of policymaking (Marcussen 2006). During this period, most central banks came to emphasise their responsibilities in respect of monetary policy, at the expense of other concerns, including financial stability. In some countries, this was reflected in organisational reforms that stripped the central bank of its banking supervisory functions. These changes took place within an ideational context dominated by a particular neoliberal ‘interpretive frame’ (Baker 2006, 2013a). Dominant economic theories and beliefs held markets to be essentially self- correcting. Because this ideational context also held politicians to be self- serving and venal, it privileged ‘depoliticising’ governing strategies, which place at one remove the political character of economic policies (Burnham 2001).
For all their similarities, in no two countries are central banks identical.
Central banks’ legal statutes, their functions and their de jure and de facto
relations with other societal actors all exhibit important national idiosyncrasies (Deane and Pringle 1994; Davies and Green 2010). One motivation for this thesis is to explain how ‘history’ has influenced the responses of the United States, the United Kingdom and the euro area to the global financial crisis in 2007. To do so, it is necessary to explore the historic trajectories and peculiarities of each central bank. Accordingly, after first discussing the macro-
history of central banking since its origins in the 17th century, this chapter will
turn to the micro-institutional development of each central bank, focusing in particular on the role that each has played in the management of financial stability throughout its history.