Central banking in pandemic times

Cornel Ban

Central banking in pandemic times

ARTICLE COMMENTARY| MAY 20 2021 Central Banking in Pandemic Times Collections: Special Collection: Global Political Economy of COVID-19 , Section: Political Economy, Markets, and Institutions Cornel Ban 1.cba.ioa@cbs.dk Global Perspectives (2021) 2 (1): 24188. https://doi.org/10.1525/gp.2021.24188 Article history Share Icon Share Tools Icon Tools Search Site The sense of extreme disruption brought by Covid-19 led to the fast adoption of unprecedented containment policies. Central banks played a key role in this regard by adopting bold and unprecedented forms of financial stabilization as well as support for government debt in the bond markets. The overall effect has been the blurring of the boundary between monetary and fiscal policy, a key pillar of the “neoliberal” era. Furthermore, the Fed acted as a de facto lender of last resort in dollars of the global financial system, thus playing a global stabilization role even as the Trump administration worked to weaken traditional US ties to global economic governance....Read more

Central banking in pandemic times and the limits of Keynesianism 2.0 A crisis like no other? In March 2020 both the Fed, the EU and the International Monetary Fund expected most advanced economies to enter the most severe recession since the Great Depression. At the time of writing this study, that fear seems to have been exaggerated. However, the anxieties about coordinated financial and fiscal collapses (rather than mere severe contractions) had been widespread in the spring of 2020. This “end of times” atmosphere, complete with the harshest lockdowns in modern memory, precipitated the entry of economic management, almost overnight, into war economy conditions. That “war economy” was not just a journalistic hyperbole but a political and technocratic one as well, as it was demonstrated by its use by elite names as different as UN head Antonio Guterres, 1 French President Emmanuel Macron, 2 Spanish prime minister Pedro Sanchez 3 or former ECB chairman Mario Draghi. 4 In turn, many high- profile orthodox economists lined up behind the “act fast and do whatever it takes” campaign. 5 And war it felt like over the next few months. The collapse of aggregate demand and international trade, as well as a sharp drop in the GDP of OECD countries created panic. According to the OECD, the global economy shrank 7.8 percent in the second quarter of 2020. In the Euro area, the corresponding figure was 12 percent, 6 an unprecedented drop in peace time (OECD 2020). Even worse, gross fixed capital formation shrunk by 23 percent in Southern Europe and by 15 percent in Western and Northern Europe. 7 The Global South experienced a $100 billion capital flight event in the spring of 2020, four times the damage caused by the Great Recession in the same timeframe. It was at this that Eurogroup President Mario Centeno junked “peacetime” moral hazard considerations: “The challenge our economies are facing today is in no way similar to the previous crisis. This is a symmetric external shock. Moral hazard considerations are not warranted here. We must bear this in mind when we consider coronavirus dedicated instruments.” 8 This sense of extreme disruption led to the fast adoption of unprecedented containment policies based on the unorthodox coordination of monetary and fiscal responses and some extensive monetary coordination between the US Federal Reserve and fourteen other central banks. Indeed, this time, the central banks’ “infrastructural power” (Braun and Gabor 2019) was deployed with stabilizing effects while the usual suspects arguing for austerity as a growth strategy (Helgadottir 2016) remained silent. 1 https://www.euronews.com/2020/03/25/coronavirus-antonio-guterres-speaks-to-euronews-about-un-s-covid-19- response 2 https://corporate.nordea.com/article/56514/chief-economist-s-corner-war-economy 3 https://www.brusselstimes.com/news/eu-affairs/104800/spanish-pm-calls-for-marshall-plan-for-post-virus-europe/ 4 https://www.ft.com/content/c6d2de3a-6ec5-11ea-89df-41bea055720b 5 http://itsr.ir/en/Content/upload/COVIDEconomicCrisis.pdf#page=56 6 https://ec.europa.eu/eurostat/documents/2995521/11156775/2-31072020-BP-EN.pdf/cbe7522c-ebfa-ef08-be60- b1c9d1bd385b 7 https://www.eib.org/en/publications/investment-report-2020 8 https://www.consilium.europa.eu/de/press/press-releases/2020/03/24/remarks-by-mario-centeno-following-the- eurogroup-meeting-of-24-march-2020/

An air bag, not an engine: the case of Euro Area central banking Although conventional economic theory and policy assign virtues to monetary policy alone and is skeptical of fiscal stimulus as self-defeating (Helgadottir and Ban 2021), the lessons of the 2008-2012 crisis had softened this orthodox approach (Metinsoy, this collection). Indeed, the ECB and other central banks adopted bold and unprecedented forms of financial stabilization and support for government debt in the bond markets. Furthermore, acting as a de facto lender of last resort in dollars of the global financial system, the Fed lowered the rate on swap lines it maintained with five other central banks (the Bank of Canada, the Bank of England, the Bank of Japan, the ECB, and the Swiss National Bank), and opened new lines in the currencies of nine other countries (Australia, Brazil, Mexico, Denmark, Korea, Norway, New Zealand, Singapore, and Sweden), thus putting a ceiling on covered interest parity deviations with the US dollar rates. This was extremely important because the swaps enabled financial institutions in the swap countries to continue borrowing in dollars from their central banks without worrying about currency risk (Bahaj and Reis 2020). Most importantly, while in 2008-2011 there was a mosaic of reactions from central banks to sovereign bond market stress, this time around central bankers used massive firepower in unison. A recent BIS report tabulating central bank interventions in the Fed, ECB, Bank of England, Bank of Japan and Bank of Canada shows that while only the Fed went as far as giving outright fiscal backing to the US government in its lending operations, sovereign debt was backed by asset purchases in all of these central banks of systemic importance monitored by the BIS (Cavallino and de Fiore 2020). To illustrate, the ECB was no exception despite it being one of the most constrained and traditionally conservative central banks. As “master of the European masters of the universe”, to paraphrase Diessner and Lisi (2020), the ECB unleashed bond-buying programs to stabilize markets to an even wider spectrum of activities, with its rates running close to zero. Thus, following the ”we are not here to close spreads” controversy started by Christine Lagarde, in March 2020, the ECB launched the 750 billion Euro Pandemic Emergency Purchase Program (PEPP) aimed at national and regional government bonds as well as private sector bonds. PEPP managed to stabilize sovereign bond markets that came quickly under stress 9 and since then there has been no sovereign debt stress in the Eurozone as a result (Fuller, this collection). One study predicted that “A fiscal stimulus at the national level backed by ECB financing reduces the output losses in the first year which would otherwise occur. The reduction in the output loss ranges from 0.5 per cent to 0.7 per cent depending on the mix of fiscal policies chosen by the State. The cumulative reduction in output loss over a five-year horizon could sum to 1.4 per cent to 2.2 per cent depending on the fiscal policy mix chosen.” 10 Less than three months later, on June 4, 2020, the ECB nearly doubled the PEPP (to 1,350 billion Euros) and made bond purchases with the aim to remove states’ uncertainty over whether ECB purchases will continue throughout the cycles of the health crisis. In late 2020, the ECB 9 http://www.cepii.fr/PDF_PUB/wp/2020/wp2020-11.pdf 10 https://www.esri.ie/pubs/QEC2020WIN.pdf#page=74

By "continental philosophy" I shall mean primarily phenomenology, which had its birthplace on "the continent" but now enjoys residence almost everywhere; but I shall also mean the "Heidelberg School," i.e., Dieter Henrich and his students, primarily Manfred Frank. Through the work of these thinkers, along with phenomenology's continued inquiry into self-consciousness, the self, first-person reference, and intersubjectivity, there have been convergences of philosophical interests on the side of analytic and continental philosophies. James G. Hart (1999), 17 Gerhard Preyer The Heidelberg School: Continuation and Innovation Edukacja Filozoficzna 75 2023 http://www.edukacja-filozoficzna.uw.edu.pl/en/nr-752023/ Dieter Henrich is one of the philosophers since the 1950s who conceived an independent philosophical approach. Ernst Tugendhat speaks of the Heidelberg School with regard to his criticism of modern reflection philosophy. The talk of a Heidelberg School is justified by the fact that several generations have been involved in its continuation since 1970. These philosophers are united by the processing of a uniform question from different perspectives. It is the question of the pre-reflexive consciousness. In the meantime, another generation has established itself, which calls itself the New Heidelbergs who have been continuing and innovating what is called “Dieter Henrich’s original insight.” Firstly, something is said about German philosophy in the 1950s and 1960s, since there is a lot of ideology in this regard. Secondly, Henrich's insight is characterised in a so-called way, which justifies the talk of a Heidelberg School (Tugendhat). Thirdly, a treatment of Henrich's research program at the beginning of the 1970s would be too one-sided if something were not also said about aspects of his work history. In this context, it is advisable to identify a leitmotif that can be used as an orientation. Fourthly, however, the epistemological interest in dealing with the Heidelberg School is not of a historical nature. Manfred Frank has continued the research program through innovation. The updating of the enduring insight of the early Sartre plays a decisive role. The continuation stands in the exchange with American colleagues and the confrontation with the ongoing problems, the philosophy of the mental (mind), the epistemology and the theory of language. However, it should also be noted that Henrich has abandoned his 1970s approach. It is argued that we do not need to follow him in this respect. Fifthly, an outlook on the progress of Henrich's enduring insight is given. Without the “continuation by innovation” of the Heidelberg School and “Henrich's original insight,“ the research program of the New Heidelbergs cannot be adequately grasped. The article was presented at the conference Philosophical Schools after 1950, University of Warsaw, Faculty of Philosophy, 9 - 10 May 2022.

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Central banking in pandemic times