Forum Summary--The Evolving Constituencies of Central Banks

What follows is a summary of the Meridian 180 forum "The Evolving Constituencies of Central Banks" (January-February 2013).

By Eudes Lopes

This forum invited Meridian members to reflect on central banks at a juncture marked by their involvement in new areas of activity and increased public scrutiny. The discussion was framed around the core question of how the relations of central banks with their various constituencies are affected as the roles of both change. The forum was launched as a prelude to a live discussion, which took place at the New York City symposium, “The Changing Politics of Central Banks,” co-organized in 2013 by Meridian-180 and the Cornell International Law Journal.

Douglas Holmes kicked off the conversation with a provocative reframing of the broad institutional field within which central banks create policy and underwrite economic expectations. Central bankers, Holmes explained retrospectively, have for several decades been engaging in a communicative experiment (both within and beyond their respective jurisdictions) in order to anchor monetary affairs conceptually. According to Holmes, “the challenge for central bankers, many of whom had a hand in designing this regime, is to navigate and manage the shifting phenomenological grounds upon which members of the public become protagonists in the monetary drama.” For Holmes, these so-called constituents of central banks are not mere passive objects of monetary policy, but also active subjects that condition the efficacy of monetary policy, as well as the legitimacy of the central bank as an institution more broadly.

This deepening of the landscape within which central banks operate resonated with Peter Spiegler, who expressed his critique of mainstream materialist narratives of value and self-worth, which according to Spiegler, are still suffused in discussions of both the U.S. Federal Reserve and financial institutions in the United States. For Spiegler, “we need to think not only about what products individual dollars may eventually buy, but also about the relational and power infrastructure through which that dollar flows. This is not only a political/ethical question, but also a practical one. If the Fed’s aim is to foster a robust economy, it must consider not only marginal effects within the present context but also its capacity to shape that context.”

Indeed, this underlying context, which functions not only as a framing device within which central banks operate but also as an object of reinvention vis-à-vis central bank action, inspired a lively debate about the relevance of the concept of independence as both a descriptive administrative framework and a prospective conceptual orientation for central banking. The forum discussion unpacked the contradictions and ironies pervasive in the appropriation of the concept of independence in both central bank discourse and practice. Minoru Aosaki, for instance, drew our attention to the unprecedented monetary easing promoted by the new Abe government elected in December of 2012 in Japan. Aosaki drew parallels between this political momentum and the broader political pressures that affected the U.S. Federal Reserve Bank in the years leading up to the U.S. financial crisis. Citing Professor Raghuram Rajan, Aosaki argued, “the reason the decision to raise interest [rates] was delayed [until 2004] is that the FRB was under political pressure from Congress because unemployment remained high.”

And yet, the question of independence is also complicated by the regional dynamics that powerfully inform conceptualizations of the constituents to which central banks are held accountable. Daromir Rudnyckyj, for example, foregrounded the case of Bank Negara (BN), Malaysia’s Central Bank, which over the past thirty years has sought to promote Islamic Finance in Malaysia and beyond. While Bank Negara is responsive to the Malaysian economy and its citizens, he argued that it is also undertaking an ambitious project to make Malaysia a so-called “global hub” for Islamic finance. According to Rudnyckyj, “BN no longer sees the constituency for Islamic finance as exclusively Malaysian citizens, but also those beyond the country’s national borders and especially those in the petro-rich Middle East.” Here, one might ask, from whom are central banks ultimately independent? Does the very concept of independence, framed in national terms, obfuscate the transnational administrative and intellectual alliances that govern central bank policy?

Daniela Gabor explored this tension productively in her comment on the relevance of collateral intermediation in the global financial markets, which she suggested, has blurred the boundaries between monetary and regulatory policies. Since private leverage relies on sovereign debt markets in collateral-based finance, Gabor argued that shadow banking relaxed the collateral supply constraints arising from tight fiscal policies. The fragilities of collateral upgrading have, in turn, led to liquidity spirals, which central banks are, in practice, responsible for containing through both a priori regulation and a posteriori open-market operations. According to Gabor, for this reason, “the return to central bank independence as we know it is impossible despite what central banks declare. In collateral based finance, it is unclear who is ultimately responsible for financial stability: governments – because it’s their collateral – or central banks – because addressing market tensions is difficult without direct support for collateral (i.e., sovereign bond) markets.”

Collectively, the contributors to this forum have raised destabilizing questions about the nature of central bank action and independence. The comments not only complicate understandings of the messy landscape in which central banks are given diverse institutional form, they also contextualize, if not downright undermine, the broader analytical strategies that sustain the pretense of independence in a context of radical material, linguistic and intellectual collaboration among central banks and their increasingly heterogeneous constituents.