Chapter 1

THE LEGITIMACY OF CENTRAL BANKING

Government bailouts. Negative interest rates and markets that do not behave as economic models tell us they should. New populist and nationalist movements that target central banks and central bankers as a source of popular malaise. New regional organizations and geopolitical alignments laying claim to authority over the global economy. Bitcoin, cell phone banking, and other new forms of money and payment systems that challenge the authority of national currencies. Low confidence in conventional currencies and the state institutions behind them. Households, consumers, and workers facing increasingly intolerable levels of inequality. New risks associated with the financial health of pension funds. Public skepticism about the “science” of monetary policy and suspicion that central bankers serve the interests of a few at the expense of the rest. Malaise and unease among central bankers themselves about the limits of their tools and the double binds that define their work.

These dramatic conditions seem to cry out for new ways of understanding the purposes, roles, and challenges of central banks and financial governance more generally. The problem is not just that dominant economic models have failed to anticipate the current predicament. The problem is also that existing frameworks are far too narrow to take into account the broader political, social, and cultural implications of the work of central bankers on local, national, regional, and global scales. The unfinished agenda of the post-2008 reforms, arguably, is an intellectual one: how to understand the place of the state in the market and, in particular, the place of the central bank in relationship to politics—in all the senses of the term.

The problem is not just intellectual. It is also political. Over the past eight years, as central banks have grappled with financial crises and economic uncertainty, they have assumed new powers and also new responsibilities. This has opened up new legitimacy challenges. In many countries, central bankers are under attack from populist politicians who have come to power on the promise of bringing the central bank to heel. On the right and on the left, new civil society groups are challenging the idea that we should trust financial regulators because they are experts in governing the economy. They are challenging the notion—accepted by most for a generation—that expertise confers legitimacy. Various groups with vastly differing agendas are asking questions like: Do central banks have the power that they do, as a matter of law? Should they have that power, as a matter of policy? What are the proper roles of experts, elected officials, market participants, and the citizenry at large in stewarding national and global economies?

Central banks serve many important purposes in our national and global markets. First, they act as a clearinghouse between private banks. When you cash a check, your bank clears that check with your counterpart’s bank through the central bank. This means that every bank has an account with the central bank. How much interest the central bank pays on funds in that account in turn affects how much interest banks can afford to pay their own depositors on their own accounts, or what interest rates banks will charge lenders. Second, central banks buy and sell government debt (and most recently other assets too, from stocks to real estate trusts) in order to stabilize the amount of money that is available in the market. If central banks buy lots of government bonds or stocks from banks in exchange for money, for example, the banks will have more cash on hand to loan to their customers. In theory, this should encourage banks to make more loans to more businesses, leading to more jobs.

Central banks also set rules for national banks as to how much money they must hold in reserve overnight. Different central banks have different mandates from their governments for all this monetary policy. Some are charged with focusing only on stabilizing prices—making sure that there is not too much inflation. Others are charged with focusing on other policy objectives, such as ensuring that there are enough jobs in the economy.

Central banks are also important regulators of banks. Their regulatory powers differ from country to country, but they often have the power to conduct inspections, audits, and other initiatives to ensure that banks’ lending practices and reserves are sufficient that they will not pose a threat to the stability of the economy.

Finally, central banks play critical roles in calibrating the interface between national economies. They buy, sell, and store foreign currencies in a way that affects the value of the national currency relative to other currencies. Some central banks have agreements to loan one another currencies in times of crisis (so-called swap lines) on the understanding that a financial crisis in one national economy can quickly spread to another. Central banks cooperate to produce rules governing what banks in each country can do. This is done primarily through the Bank for International Settlements, a global organization of central banks, but also through other international institutions.

In this book I will show that the conflicts about who gets to decide how central banks do all these things, and about whether central banks are acting in everyone’s interest when they do them—in short, conflicts over central bank legitimacy—are in large part the product of a culture clash between experts and the various global publics that have a stake in what central banks do. Experts—central bankers, regulators, market insiders, and their academic supporters—are a special community, a cultural group apart from many of the communities that make up the public at large. We are all products of our particular cultural environments. These cultures shape everything from our political views, to how we communicate, to what situations make us comfortable and uncomfortable. There is nothing inherently wrong with this, nor is one cultural view right or wrong. But when the gulf between the culture of those who govern and the cultures of the governed becomes unmanageable, the result is a legitimacy crisis. Legitimacy, in other words, is not just political. It is also cultural.

This book is a plea for all of us—experts and publics alike—to address this legitimacy crisis head on, for the sake of the health of both our economies and our democracies. It will not be easy. Central bankers and other experts will need to begin to anticipate and take into account the potential far-reaching political consequences of their policies. They will need to account for their roles in the rise of new populist movements angered by bank bailouts and foreign swap lines. And they will need to make much more intensive efforts to reach out beyond the boundaries of their own cultural community. Certain institutional reforms, and certain new uses of existing institutional levers, can facilitate this important work. Civil society institutions, from the press to the NGO community, have a critical role to play. And all of us as members of the public must engage the experts and the issues as if the things we value, from our retirements to our democratic process, depended on it.

If we do this, I will argue, we can put our institutions back on legitimate political ground. The purpose of public engagement is ultimately a new theory and practice of legitimacy, something other than “just trust us—we’re the experts and we know best.” We need a new explanation for why the work of central banks is important and legitimate that we can all believe in and a new way of living that legitimacy.

As an anthropologist and a legal scholar, I have spent the past twenty years studying the culture of central banking and the social relationships between financial regulators and other market participants. My method, as I have outlined elsewhere,1 is ethnographic, the method traditionally deployed by anthropologists.2 The core element of ethnography is fieldwork—a sustained and engaged form of study based on relations of trust with one’s subjects, often over long periods of time. In my case, this has included field research within the financial markets, with financial policymakers, experts, and businesses across the world.

One of the reasons ethnography is so valuable to the study of finance is that the anthropologist specializes in understanding what is so important, so fundamental, so much a part of taken-for-granted agreed bases of social life that it goes largely unnoticed. If the actors could simply tell you about the symbolic structure underlying their kinship, for example, you wouldn’t need ethnography; you could simply conduct a telephone survey. Long-term ethnography, moreover, gives me the opportunity for constant feedback and criticism from contacts in the market. When they think I have gotten something wrong, they are not at all shy about letting me know.

This book is also the product of a collaborative effort by a group of academics, policymakers, and financial experts around the world to address the contradictions and limitations of the mainstream paradigm and to imagine an alternative. This work was organized and sponsored by Meridian 180, a nonpartisan global think tank of over 800 academics, policymakers, and businesspeople that I direct, based at Cornell Law School in partnership with Cornell University’s Einaudi Center for International Studies, Ewha Womans University in Korea, The University of New South Wales in Australia, as well as the University of Tokyo Institute of Social Science, Ritsumeikan University, and Keio University in Japan. Over a five-year period, Meridian 180 organized a series of virtual and live discussions analyzing emerging trends and potential crises in central banking, from central bank independence to Bitcoin.

Several factors have distinguished our deliberations from many of the discussions in both academic and policy fields. First, unlike most conversations about central banking, our conversation has been deeply interdisciplinary and transprofessional. We have created a safe and respectful place in which experts can step out of their silos and explore other points of view. Second, given Meridian 180’s focus on rethinking global questions from the point of view of a center of gravity in the Asia-Pacific region rather than the North Atlantic, our conversation has involved deep and rich participation from areas of the world that are usually only marginally represented in discussions of central banking. The Japanese experience with quantitative easing and other unconventional monetary policies known as “Abenomics”—policies that aim to fire up the economy by increasing the amount of money banks have available to lend to businesses and consumers and encouraging banks to make loans and consumers to invest in the stock market—has given the world one very important challenge to dominant paradigms of central banking. Through these experiences, the question of how to deal productively with the political dimension of central banking emerged as a theme for our collective deliberations.

In April 2016 and May 2017, a group of policymakers and academics convened at Cornell and in Brussels for a series of closed and off-the-record discussions. We analyzed various political dimensions of central banking. The meetings also included presentations by faculty and advanced doctoral students from the fields of law, political science, economics, sociology, and anthropology about the limits of the dominant paradigm, the state of the art, and what remains to be learned about the politics of central banking in various disciplines. Out of those discussions came the final argument of this book.

The book has three disparate audiences in mind—academics, policymakers, and the public at large. The ultimate message is the same for each, however—these three groups need to do much more listening, collaborating, and coordinating.

It Is Time for a Paradigm Shift in How We Think about Central Banks

A half century ago, the physicist Thomas Kuhn wrote about how a “paradigm”—a universally accepted framework for understanding how something works—changes. For example, how do people go from believing that the world is flat to believing that the world is round? People begin to notice that certain things cannot be explained by the dominant paradigm. At first, they deny those things—or explain them away. When that no longer becomes possible, they start to make exceptions or to suggest moderate amendments that preserve the core of the old paradigm while allowing for some change on the fringes. Finally, at some point, the cumulative weight of all those exceptions becomes so great that the dominant paradigm collapses. Often this is a tumultuous, chaotic moment: people don’t know what to believe. Eventually a new paradigm emerges.

This same process is currently under way for how we understand what central banks do as an empirical matter, and what they should do as a normative matter. For some time, it had been commonly accepted that central bankers are technocratic experts, financial engineers whose work is removed from cultural considerations. We viewed managing the economy as something highly technical, with right and wrong answers, best left to the scientists. Just as with the process of engineering a bridge or building a rocket, without the proper training we would have little to add to the conversation, and probably little interest besides. We had no need to think about it too much, as we could trust the experts to come up with the right answers.

But events during and since the financial crisis of 2008 have rendered this understanding of central banks increasingly untenable, both to the experts and to the public at large. First, the economy is not responding as technical expertise says it should, leading to doubts about how good the expert knowledge is. Second, the public is beginning to realize that embedded in those highly technical questions are other issues that are of concern to ordinary people. Even if I as a layperson do not understand all the engineering that goes into building a bridge, I may care intensely about where that bridge does or does not get built and about how many lanes it has. To the extent that it determines how much of a toll I will have to pay every time I cross it, I will also care about what financing model is used to fund the construction. We are at a moment, in other words, at which the old paradigm is collapsing. But as of yet, there is no alternative understanding—no new paradigm—ready to take its place.

This book proposes a simple but transformative shift in our understanding of what central banks do, why they do it, and how they do it. Central bankers, like all policymakers, are cultural actors, and central banking is not just a technocratic but also a value-laden activity. This is nothing to be ashamed of, nothing illicit—on the contrary, it needs to be acknowledged, embraced, appreciated, studied, and also managed and stewarded. This basic insight gives us a new way of seeing what goes on in central banks and of evaluating the relationship between various actors in and around central banks, from academics to politicians, journalists, activists, and the average soccer mom voter. It also creates new responsibilities not just for central bankers but for the public and the institutions of civil society.

To say that central bankers are cultural actors or that value choices are at stake in the technical work of central banking is not to say that central bankers are partisan (favoring one political party or one candidate over another) or that they always or intentionally act in a way that favors one social, political, or economic group at the expense of another. Central bankers rightly bristle at that kind of simplistic attack, and, lacking a better explanation for their actions, retreat behind an equally caricatured public persona of the technocratic machine. We need a richer understanding of culture and value choices—as something ubiquitous, unavoidable, legitimate, important, highly complex, and entirely compatible with scientific and financial expertise.

Although the academic theories that guide central bank policymaking suggest that policy turns solely on economic factors, real-life central bankers navigate their way through dense cultural thickets on a daily basis. Existing academic theories and policy playbooks do not teach central bankers how to anticipate and manage the multiplex cultural environments in which they operate—from global to regional to domestic institutions, from populist media to government agencies and branches, from academic conferences and research projects to financial markets. The most successful central bankers learn to manage these daily pressures through apprenticeship to their seniors, or by trial and error.

Tensions and contradictions in the dominant story we tell about central banks only make the problem worse. For example, if central banking is a technocratic science, why do economies no longer respond to monetary policy as economic theories predict that they should? What exactly should be the purpose, mission, or mandate of the central bank vis-à-vis the nation or the global economy? How should the central bank be held accountable? Central bankers must respond to such questions all the time—from social movements, from journalists, from politicians, and even from judges.

Among ordinary citizens, consumers, and investors, the idea that central banking entails value choices and that values are culturally influenced is instinctively understood. But too often this value-ladenness becomes a reason to denounce the experts, and oversimplifications and misunderstandings abound. The financial crisis and the response of central banks and governments have created a new backlash among publics at large in many countries. These publics have lost faith in experts in general, and no longer believe that the game is fair. From currency disputes in the United States and China, to political conflicts over the fate of a common currency in Europe, to political movements such as Audit the Fed on the right and Occupy Wall Street on the left, many people outside the central bank no longer have faith in the idea that what central banks do is purely technocratic. Lacking a better understanding of the culture of central banking, citizens often denounce central bankers as politically partisan. Popular rage against financial policy will make future governmental and central bank intervention along the lines of what was done in 2008 all the more difficult. The anger and frustration in these debates speak to the need for a way of talking about central banking that can cross the cultural divide that separates experts from ordinary people. We need a new theory of central bank legitimacy that is both believable and worth believing in.