José Manuel Suárez Mier*
Central banks were created to provide strength to countries’ financial systems, acting as their lender of last resort and offering the necessary liquidity to face the recurring crises that afflict the banking systems and thus restore or preserve their stability.
In many cases, central banks were also used as the “petty cash” of governments because of their ability to create money, which allowed spending seemingly without limit, something that is always popular, without having to raise taxes, which never seems timely, or issue public debt at a high cost.
When this happened, it was always followed, sooner or later, by the fearful inflation, that is, a generalized rise in prices, which in fact is an invisible tax paid by those who have their savings in cash or in assets that are not revalued with the inflation, which are usually the poorest.
After multiple inflationary episodes that devastated many countries and sowed resentment between social classes, who blamed each other for the rise in prices, it was decided that the central banks should be given autonomy from the government and prohibited from financing their debt.
However, the autonomy of central banks, key to the disinflation achieved in many countries, is now being questioned for having failed to prevent the Great Depression of 2008 and that injecting liquidity to overcome the crisis led to low-interest rates, which devastated to poor savers, while it gave record profits to stock market investors, who are often the richest.
Thus, central banks are blamed for exacerbating the poor distribution of wealth and being “undemocratic” by not directly depending on those elected by popular vote to lead governments and wanting to endorse new functions that have nothing to do with its essential mission.
Just look at the program of the monetary conference convened by the respected institution, the National Bureau of Economic Research, for next June 12:
- Monetary policy and racial inequality; 2. Monetary policy and inequality (economic); 3. Mortgage prepayment, race, and monetary policy; 4. How unorthodox is green monetary policy?
Regarding this last issue, the Bank for International Settlements just had its virtual conference with the title The Green Swan 2021: Central Banking and Financial Stability in the Era of Climate Change, in which it was discussed how national and financial systems should face climate change and its consequences on economies.
All this din about the “imminent debacle” that looms over humanity and the role that central banks and the world financial system should play, is based on the debatable premise proposed by the alarmists of global warming and its aftermath, which are fanciful and exaggerated.
I’ll explore the plausibility of climate catastrophism in future installments.
*Consultant in economics and strategy in Washington DC and professor at universities in Mexico and the US. Email: aquelarre.economico@gmail.com
This column is also published in Spanish on June 3, 2021, in the Excélsior newspaper, based in México City.