By Tilak Doshi,
Not often does a central banker get called a “rock star” but that is among the accolades frequently cited in introductions to Mark Carney, the former Governor of the Bank of England (2013 – 2020). The BBC was no exception and recited the ‘rock star’ moniker in introducing Carney for the prestigious Reith Lecture last week. Posing the ‘triple threat’ of credit, Covid and climate, the lecture starts off reminding its audience that there is always a ‘moral dimension’ to doing business. Given the existential threats of climate change and Covid-19, central banks as the supervisors of credit need to “give shareholders the ammunition they need to impose their moral sentiments on the managers of their assets”.
One would think that the appropriateness of the image of a central banker as a ‘rock star’ is the least of our worries in a world beset by the Covid-19 restrictions and widespread economic carnage. But will Carney ‘rock’ the world’s central banks into abandoning their narrow mandate to ensure financial stability by managing liquidity and interest rates? Are we on the cusp of seeing central banks wade into the murky politics of ESG (environment, social and governance criteria), CSR (corporate social responsibility) and stakeholder capitalism?
Those of us above a certain age were brought up with the rather droll image of central bankers as those whose job was to “take away the punch bowl just when the party gets going’”. The narrow mandate for central banks was to avert financial crisis and achieve price stability by utilizing its tools of credit creation and interest rate guidance. But Carney has far larger – indeed, planetary — concerns in mind. Appointed UN special envoy for climate action and finance in December last year, he is ‘signed up’ to galvanize action among financial institutions in the lead up to the global climate talks due to take place in Glasgow in November 2021.
Carney tells us that it is time to abandon the laissez faire ideologues of right wing think tanks, and enlist the central banks to join the ‘fight against climate change’. The great founder of classical political economy Adam Smith, Carney points out, was also the author of The Theory of Moral Sentiments and not just the The Wealth of Nations. In Carney’s view, Milton Friedman — the famed Chicago economist, Nobel Laureate and advisor to Margaret Thatcher’s monetary policy — abused Adam Smith’s vision of a moral economy and led to the “corrosion of the drift from moral to market sentiments”. Carney, to be sure, “does not want to pin it all on Milton Friedman”, but the Nobel Laureate moved the pendulum “in the direction of the primacy of profit”. The caricatured economist hence became ‘one who knows the price of everything but the value of nothing’.
The appointment of Mark Carney as UN special envoy encapsulates the move in a number of countries that seek to link central banks directly to the climate change cause. Many Western private banks and multilateral financial institutions such as the World Bank, the Asian Development Bank, the European Investment Bank and the International Monetary Fund have already stopped the funding of fossil fuel-based projects.
The European Central Bank now pursues policies to coerce European banks and private sector companies to defund ‘dirty’ industries . Companies that issue debt will be pressured to avoid the fossil fuel sector and instead to make ‘green’ investments that have the approval of the ECB. The European Central Bank will start accepting bonds linked to ‘sustainability’ goals in January as part of the ECB President Christine Lagarde’s drive to press ahead with the green agenda.
So a central bank will now be involved in defining which industry is more ‘dirty’ and which less, presumably depending on which global warming model it adopts for its internal planning and valuations. One can imagine the ECB issuing reports on how its purchase plan for green bonds — no doubt at prices higher than what uninformed ‘market sentiments’ would value them at — will lead to lower earth temperatures 80 years hence.
In noting this dangerous ‘mission creep’ of central banks, Professor John Cochrane of the Hoover Institute warns us that the boardrooms of central banks risk becoming politicized like other arms of government. The US Department of Energy’s $535 million failed loan to the solar-panel manufacturer Solyndra during President Obama’s administration is just one instance of the more scandalous examples of renewable energy subsidies that lost tax-payers’ money.
If the historical record of governments successfully ‘picking winners’ is a skimpy one, that of cozy business-government relations (‘cronyism’ is a better word) in pursuit of pet causes – one can’t improve on “saving the planet” – is a rich one. It was another Nobel Laureate economist, George Stigler, who first raised serious attention in the 1970s on the problem of “regulatory capture” as government departments increasingly become the creatures of those they are mandated to regulate. There are few better illustrations of Stigler’s theory than Obama Environmental Protection Agency’s “sue and settle “ practices — deals through which friendly environmental groups file lawsuits against federal agencies so that court-ordered “consent decrees” are issued based upon prearranged settlements crafted together by like-minded climate advocates behind closed doors.
The involvement of central banks in the climate cause, however, risks damage at orders of magnitude over what even a hyperactive, weaponized EPA could achieve. The politicization of the capital allocation process risks an end to the free enterprise system itself. The considerable power of the central bank over investment decisions and corporate behaviour is seen by environmental advocates as the key to achieving the global transformation needed to ‘fight climate change’ – the ‘Great Reset’ as elaborated by Klaus Schwab, founder of the World Economic Forum and chief impresario of the Davos jet-set.
The argument that climate change is a risk to the financial system allows central banks to change the terms of the financial playing field in favour of ‘ESG’ businesses, and at a stroke destroys the impartiality of central banks towards different regions and sectors of the economy. At the ECB conference on Monetary Policy in October, Prof. Cochrane notes the irony involved in this. In his view, climate change does not play a role in financial risks facing private sector companies in the 1, 5 or even 10-year range and insurance companies have more than adequate means to handle the impacts of naturally variable weather. To the contrary, the key risk facing private enterprise in the West is now posed by the financial regulators themselves.
Now that the ECB has already become the financial vanguard in the Global Reset and ‘net zero emissions by 2050’ agendas under Christine Lagarde, all that is left is for the Biden administration to unleash Janet Yellen (picked for the Treasury Secretary position) when it presumably takes office on January 20th. Yellen has already promised to use the wide-ranging regulatory and oversight powers of the Treasury department to fix not only the ‘climate crisis’ but also other causes of the progressive package such as gender and racial ’inclusivity’.
U.S. corporate law requires that company directors and executives have a fiduciary duty to shareholders. In open and competitive markets, enterprises which deliver goods and services at the best combination of quality and price as perceived by consumers are those that serve the shareholder interest best. So long as they abide by the rules and ethical norms of the game, shareholder capitalism is the best game in town, as Prof. Friedman argued in a celebrated essay 50 years ago.
When central banks attenuate the shareholder rule, it is an invitation for special interests to encroach into the heart of the financial system. The central banks’ headlong rush into climate policy will fatally compromise their ability to fulfil their only legitimate role in a democracy: to ensure sound money and stem financial crises. Not that they have excelled in this basic role, having floundered in the last financial crisis. Central banks would be well advised to avoid the moral sentiments of rock stars as their guide.