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Greening central banks is a measure of political weakness

ECB Building 230x150
By Owen Sanderson
12 Nov 2019

Green quantitative easing is having a moment. As the European Central Bank restarts the ordinary brown kind of money printing, buying corporate and public sector bonds, a broad range of commentators, from left wing activists to BlackRock’s head of official institutions, argue that central banks ought to put their balance sheet power in play to green the world. But turning to the central banks is a counsel of despair. The technocrats should be a last resort; it is politicians who should be in the vanguard.

Calls are growing louder for central banks to save us again. First it was from financial oblivion, then from slowing economic growth, and now from climate change as well. BlackRock’s head of official institutions and former IMF official Isabelle Mateos y Lago, writing in the Financial Times on Monday, argued that central bank mandates allowed them to tackle climate change, while campaigning groups have been pushing lenders of last resort to take on a green mandate for years.

The unedifying spectacle of the ECB firing up its Corporate Sector Purchase Programme for the first time, shortly after the Volkswagen emissions scandal broke, prompted extensive criticism of central bank bank attempts to be “market neutral” by buying every eligible asset.

Other central banks, notably the Bank of England, have been pushing to use levers other than QE to green the financial system. Its governor Mark Carney pushed forward the Taskforce on Climate-Related Disclosure, and has been at the forefront of stress testing insurers for climate-related risks (partly, it’s true, because the UK hosts much of the global reinsurance market).

Central banks can have a big impact on financial markets. They can make debt cheaper or more expensive, they can tweak repo policies, or incentivise CFOs to sit up and take notice of certain risks.

Indeed, an overt commitment to “green QE” could certainly establish the elusive “greenium” — central bank-eligible paper, whether for outright purchase or repo, reliably trades tighter than ineligible alternatives.

But such a policy has real costs, though. First off, regulatory favour for certain assets opens up regulatory arbitrage. At the moment, green bond issues, or those with high environmental, social and governance assessments, are a point of pride for issuers, with skinny financial incentives. That pushes participants to race to the top, adding new monitoring and green marketing all the time.

Add a regulatory sweetener, though, and it becomes a race to the bottom, as every issuer jostles to squeeze their debt into whatever green box the central bank deems appropriate. Green status will become another needle to thread, along with credit rating, accounting and tax treatment, and the brightest minds in capital markets will start work figuring out how to game the system, rather than save the planet.

Some also worry about diluting the mandate of central banks, away from core values of inflation and financial stability. Focusing on the financial stability risks of climate change goes some way to squaring that particular circle — but more than a decade into ‘extraordinary’ monetary policy, hidden swap lines, and money-printing, it’s hard to feel too puritanical about a rigid view of central bank mandates.

The biggest worry, though, ought to be what reliance on central banks says about the state of political debate on climate change. It is an overtly political topic, involving hundreds of billions of potential expenditures, winners and losers throughout society, major changes to lifestyles and serious generational commitment to action.

That requires democratic debate and political willpower — not technocratic changes that raise or lower the cost of capital for certain activities. It’s hard to see how that can be brought forward in the dysfunctional politics of the UK and US, though other countries may find it possible, but it cannot be right to once again lean on the central banks as the only adults in the room.

In 2008, the US Federal Reserve rescued the global financial system in 2008 by the back door, offering swap lines to global central banks, and lending dollars in vast quantities to foreign banks. If that had been subject to democratic control, a Republican controlled Congress would have blocked the pipes, as it tried to with the US stimulus package. As the eurozone debt crisis mounted, political deadlock at the EU level, and a fear of fiscal stimulus forced the ECB, not the Eurogroup, to be the entity that rescued the single currency.

But while these rescues just about kept the wheels on the global economy, there has been no real reckoning since then — no attempt to make politics catch up to the central banks, or to rein in the technocrats from tackling the next round of challenges. That has played its part in stoking resentments, with asset prices inflated while government budgets stayed tight, and it appears to be getting worse, not better.

Perhaps there’s no prospect of any improvement in political leadership coming, and certainly no leader with the quality, courage and political capital needed to tackle climate change. But the fact that central banks are once again thrust forward to save the world shows that very weakness. Bring forward green QE if necessary, but it’s a poor substitute for real political change.

By Owen Sanderson
12 Nov 2019