In the fast-paced world of finance and economic policy, the spotlight often shines on central banks only during times of crisis. Yet, as we usher in a new year, it’s crucial to recognize the pivotal role these financial guardians play in shaping the destiny of nations. Federal Reserve Chair Jerome Powell and his counterparts around the globe, once reviled, are now hailed as saviors. But their mission is far from accomplished.
As we anticipate a potential global recession, witnessing a rapid decline in inflation and projections of interest-rate cuts, it’s essential to understand that central banks are not merely economic referees. They are the unsung heroes of statecraft, holding the key to a nation’s economic and security well-being, as history consistently demonstrates.
The recent memory of the 2008 subprime crisis, the euro debt debacle, and the peak of the COVID-19 pandemic illustrate the pivotal role central banks play in rescuing economies. Looking ahead, Asia faces tests that could determine how well political leaders manage without the monetary safety net. Will Jakarta turn to Bank Indonesia to directly finance the budget? How will Japan, accustomed to ultra-cheap money for decades, navigate a surge in defense spending?
A recent paper by Will Bateman from the Australian National University sheds light on how central banks, led by figures like Powell, have historically supported fiscal policies during critical moments, facilitating broader national objectives. From effectively pegging rates during World War II to underwriting President Woodrow Wilson’s wartime spending, central banks have been crucial in shaping the course of nations.
Bateman emphasizes that central banks should be viewed as geopolitical assets. In an interview, he highlights their role in major military investments, currency control, import-export regulation, food security, supply-chain protection, and social insurance. Without a stabilizing monetary authority, governments cannot execute these geo-economic policies effectively. The central banks act as the financial intermediary between the treasury and private creditors, ensuring stability in times of uncertainty.
While the Federal Reserve sets the pace, it is not alone in its endeavors. European Central Bank President Christine Lagarde recognizes the need for a new policy framework in an era of heightened competition between the US and China. Lagarde emphasizes the importance of greater cohesion among various arms of government in the face of a fragmented global economy and fractured supply chains.
Despite these crucial roles, central banks have, by and large, remained focused on traditional responsibilities, avoiding what could be perceived as mission creep. However, recent history, particularly the global response to the COVID-19 pandemic, reveals a return to a more historical role of central banks assisting fiscal authorities to achieve national goals.
In times of uncertainty, whether it be prolonged conflict in the Middle East, tensions in Ukraine, or the unpredictability of elections, history offers solace. Numerous examples showcase central banks, as Mario Draghi eloquently puts it, doing “whatever it takes.” Far from dull econometric maneuvers, these monetary agents of statecraft have a profound impact on the well-being and stability of nations.
As we navigate the complexities of a changing world, it’s time to appreciate the unsung heroes behind the economic curtain. Central banks are not just about interest rates and inflation targets; they are the linchpin that holds together the intricate fabric of a nation’s prosperity and security. It’s time for these agents of statecraft to step out from the shadows and receive the recognition they deserve.