The new role of central banks[1]

[1] Institutions always and continuously undertake new roles in accordance with the requests coming from the underlying social and economic fabric. Generally, amendments to the relevant legislation afterwards formalize - sooner or later - what actual trends have already somehow implemented.

To a closer look, central banks have always had a quite prudent attitude and have always been careful not to implement non-conventional liquidity supplies to the economic system, also during crises[1].  The recent historical reason for such a “cautious attitude” lies with the termination of Gold/Dollar convertibility, in 1971, when the USA unilaterally withdrew from the Bretton Woods Agreement, which was signed in 1944.

Some action by the Central Bank seemed necessary in order to ensure some stability of monetary systems, which had lost the small link they had up to that time to something real – i.e. their convertibility into gold[2].

Nevertheless, the recent and repeated economic crises have well emphasized the inadequacy and non-sufficiency, in a number of aspects, of fiscal policies alone[3], which have shown obvious limits in their ability to face effectively and, most of all, efficiently long periods of economic stagnation and recession.

Indeed, fiscal policies are but one ingredient that, although an important one, needs to be combined with an adequate and consistent monetary policy.

The present situation, as described, with government debt on the increase and any further increase in tax revenue next to impossible, shows that central banks have, therefore, been subject to significant pressure to implement “non-conventional” measures. The recent Quantitative Easing[4]measures, which were first implemented by the US Federal Reserve and later - perhaps too late, because of the constraints resulting from the applicable treaties[5]- by the ECB, amount to clear empirical evidence, if one be needed, that, in the present complex economic and financial systems, monetary measures must be combined with an investment-oriented fiscal policy.

The measures implemented by the Central Banks seem to be insufficient on their own and, actually, an accommodative monetary policy aimed at fostering demand for credit, might fails to generate the hoped-for effects.

“The horse doesn't drink” is the economists' jargon expression to say that the liquidity supply in the economic system has not generated the hoped-for effect, i.e. the economy does not recover.

This is an unwanted but predictable effect, as stated above, considering the present fragmentation affecting the two main economic policy tools, namely monetary policy on the one hand and fiscal policy on the other.

 Substantial amounts of money going into banks' financial circuits inevitably cause, in the first instance, these resources to be used in favour of the banks themselves, as it has occurred in the last few years with the subscription of Government securities that had a higher yield than the very low funding cost set by the ECB. In this regard, using mathematical models, economists could easily demonstrate the loss in efficiency of a system working in such a way. Therefore, it is “empirically wrong and, thus, to be advised against from a practical standpoint” to uncritically pour financial resources in the traditional banking channels where it does not occur in effective coordination with investment and expenditure policies, both state and private. In other words, the standard credit intermediation function performed by banks in serious recession scenarios seems, today, not sufficient.

Having said that, however, it must admitted that monetary governance independence, which started in the mid-1980s, on the one hand, has certainly contributed to protect banks from strong political pressure requesting, always and no matter what, coverage of budget deficit; nevertheless, on the other hand, it has progressively deprived the State, as a social and political entity[6] (up to full abdication, with the introduction of the Euro) of its authority– prerogative (even though indirectly exercised) that, together with the fiscal one, seems essential for the State's very survival, i.e. the monetary authority.

Beside the negative effects caused by the separation between the two economic policy levers, another important aspect must be considered, namely the need for impartial governance of monetary policies.

Also in this regard, the implementation of the neoliberalism creed could be detected, which, in the name of the functionality of markets[7] has, to an ever-increasing extend, deregulated and privatized also the financial and banking system in its entirety, thus causing, at least in Europe, monetary governance to become a somewhat private affair, even though in an institutionalized way based on the relevant legislation, namely the European treaties currently in force.

Even without reaching extreme conclusions, the European system cannot but be defined as hybrid, since the ECB's shareholders are the single national central banks that are, in their turn, held by the individual private banks. In this regard, economic sociology stresses the risk of private interest meddling in choices that, conversely, should be driven exclusively by public-interest criteria.

Nevertheless, it must however be concluded that, at least traditionally, the separation between monetary power (reserved to the banking system, led by the central bank) and fiscal power (reserved to the State) is considered and accepted as a historically physiological fact in economic governance.

However, it is quite evident that, with the present severe systemic crises, alternative economic governance models must be searched for, which aim at the unification of and coordination between fiscal and monetary policies.


[1] One of the causes that worsened the effects of the 1929 crisis was the fact that the FED did not implement bailout measures. In a scenario featuring no direct action by the central banks, no extraordinary plans for liquidity supply, to help the economy, an active role is played by the IMF that, as it is well known, grants loans to States at very onerous conditions.

[2] However, what is stated at the beginning of this paper is not to be forgotten: even gold is something symbolic, whose value is ancestrally rooted in its function as a tool to mediate with gods.

[3] It is well known that, in political economy, the term “fiscal policies” has a wider meaning than tax policies that concern the revenues from taxation, since the former deal with effective actions in the form of government investments that are fit to foster the recovery of the economy that is in stagnation or recession.

[4] These measures, which consist in the purchase of Government securities at low interest rates on the secondary market, are defined as non-conventional measures since they depart from the standard monetary policy tools used by central banks, such as changing interest rates.

[5] As well known, the Maastricht and Lisbon Treaties have vested the ECB with the role of inflation watchdog (while it may not implement measures explicitly supporting the economy) with a target trend rate that should be close to but below 2 percent. Also in this case, as they go on, social and economic trends have indeed caused a material change in the legislation structure, even a supranational legislation, which, upon its preparation, approval and implementation, seemed an untouchable and unchangeable totem.

[6] An entity whose primary purpose is the general welfare of individuals, based on social cohesion and solidarity. Indeed, these principles are contained in all constitutions.

[7] The relevant theoretical model, in its practical implementation, shows severe inconsistencies: indeed, in general enterprises do not thrive (except for those that have transnational sizes) and employees are dismissed or their economic and non-economic conditions worsen (precariat). All this seems unavoidable considering the fact that deregulation has allowed large enterprises, who can afford it, to relocate production in areas of the world where the labour cost is very low and where controls on safety and environmental protection are close to non-existent, thus implementing a disastrous competition based on lower and lower prices.