The monetary-academic complex

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military–industrial complex. The potential for the disastrous rise of misplaced power exists, and will persist.

U.S. President Dwight Eisenhower

Today, the military hardly has any influence on European governments.

In contrast, the European Central Bank (ECB) is a very powerful institution. Former ECB President Trichet put pressure on government leaders with (secret) letters. Former ECB President Draghi said “whatever it takes“, and the euro crisis was over.

What group of people has the greatest influence on the ECB?

Bankers? Lmao. A quick look at the share prices of European banks tells you everything you need to know about the “power” of private finance.

No, academics are the real rulers of the ECB.

Sounds absurd?

Three of the four Members of the Executive Board1 have PhDs in economics (Lane, Panetta, Schnabel). Two of them are professors.

Former President Draghi was a professor.

After your tenure at the ECB, you can pass the revolving door into a professorship.

For the lesser gods of economics, the ECB has conferences and research positions.

Maybe Europe should guard against the acquisition of unwarranted influence by the monetary–academic complex. The potential for the disastrous rise of misplaced power exists, and will persist.

What do economists know?

Three articles casting doubt on the validity of economic knowledge.

Dirk Bezemer describes the shifting opinions of Dutch economists. Since the coronavirus pandemic, the majority thinks government debt can rise to 90% of GDP without causing problems. Few believe the 60% debt-to-GDP ratio of the Maastricht Treaty is a sensible ceiling. Compare that to December 2019, when planners at the CPB wrote that ‘sustainable’ government finances would stabilize debt at 25% of GDP. Thinking has also shifted about topics like the flexibility of the labor market, taxation and the climate responsibilities of the ECB. All of this raises questions about what economists really “know”. Is all of it politics dressed up as “neutral science”? Bezemer exposes the secret:

“The consensus among policy economists, including those at universities and research institutions, appears to correspond surprisingly well with current policy. That what becomes politically opportune, or simply happens, is suddenly embraced by many economists as being sensible and responsible.” (own translation)

JW Mason is pessimistic about macroeconomic theory:

“What is taught in today’s graduate programs as macroeconomics is entirely useless for the kinds of questions we are interested in. (…) [Macroeconomics education] provides no preparation whatsoever for thinking about the substantive questions we are interested in. It’s not that this or that assumption is unrealistic. It is that there is no point of contact between the world of these models and the real economies that we live in.”

This explains Bezemer’s secret: when the models don’t put constraints on what we expect to happen in the real world1, it’s convenient to follow popular opinion of the people in charge.2 Instead of rigorous science, policymaking relies on “a kind of folk wisdom — low unemployment leads to inflation, public deficits lead to higher interest rates, etc.”. Like Bezemer, Mason concludes that

Keynes got a lot of things right, but one thing I think he got wrong was that “practical men are slaves to some defunct economist.” The relationship is more often the other way round. When practical people come to think about economy in new ways, economic theory eventually follows.

Bezemer and Mason are not two disgruntled outliers. A survey of almost 10,000 economic researchers found that most are dissatisfied with the status quo, in terms of research topics and objectives.

Climate change and finance

Literature:

Links summer 2021

Green and ethical banks in Europe

European banks with an explicitly green or sustainable profile:

Ethical banks:

See also:

Febea (European Federation of Ethical and Alternative Banks and Financiers)
GABV (Global Alliance for Banking on Values)

Banking on YouTube

I’m trying something new. I’ve started making videos about banking, monetary policy and sustainable finance.

I’m still trying to figure out the best format. But I already like the ability to use graphs and pictures. Compared to blogging, video is less nuanced. For example, you can’t link to all sources. But maybe that’s an advantage.

Here’s the first one, let me know what you think!

Is climate change the job of central banks?

Background literature:

  • Conny Olovsson (Riksbank) argues that “monetary policy does not have the appropriate tools for counteracting global warming, but global fiscal policy is significantly better suited for this purpose.”
  • Isabel Schnabel (ECB) argues that climate risks are mispriced by financial markets. Central banks should not sustain market failures.
  • The fraction of bonds issued by carbon intensive companies in the ECB’s CSPP portfolio and accepted as collateral is far larger than the GVA of these companies, see e.g. Matikainen (figure 3) or Dafermos (figure 4).
  • Paris Agreement, Article 2, 1(c): This Agreement, in enhancing the implementation of the Convention, including its objective, aims to strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty, including by: Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
  • The European Green Deal is a priority of the European Commission.
  • Lagarde has said climate change is the job of the ECB: “[w]hether climate change (…) is to be considered as part of our primary objective. And the answer is yes.” (1:44)
  • A green mandate for the ECB? Dirk Schoenmaker says yes, Hans Peter Grüner says no.