The ongoing dance between finance, the state, and central banks

The Jain Family Institute held a web conference last week on “Global Power in the North Atlantic Financial System.” The starting point was the article “The Class Politics of the Dollar System,” which I highly recommend to anyone interested in the role of the dollar in the international economy.

The talk is interesting throughout, and moves between debates about the dollar, its relationship to empire and global class interests, financial capitalism, and environmental politics.

The discussion got me thinking about the relationship between the state, finance, and central banks in a green transition:

How should we think about the relationship between the state and finance? Daniela argued the state is a “derisker,” whose main role in the allocation of capital is reducing risk for private actors. This “derisking” takes many forms, from traditional lender of last resort (LOLR), to backstopping entire securities markets. It means Public-Private Partnerships where the state guarantees private providers payments or provides subsidies.

Within this arrangement, central banks are both a mechanism for carrying out derisking, for example as the LOLR, as well as ensuring state’s comply with their role by acting as an independent check on fiscal activity (e.g. Greenspan threatening to raise rates if Clinton did not balance the budget).

This arrangement is stuttering today, in part because finance, despite enormous de-risking, is perhaps not allocating enough capital to long-run investments. Three decades of fiscal conservatism has rubbed off on politicians, who are now content to leave macroeconomic management to monetary policy. This leaves central banks forced into increasingly fiscal looking activity to maintain growth. What is required – “demand spending with supply effects,” or what the IMF calls ‘quality spending’ – is beyond the political limits of what central banks can (are willing to) do.

The green transition looks like a promising way out of this impasse. Unfortunately, its potential is being undermined from two directions. First, efforts underway by private finance to keep the state’s role in a green transition to a “derisking” one; a counter-project to a Green New Deal. At the same time, proponents of a Green New Deal have to grapple with the repeated failures of state capacity across the West since Covid. Reclaiming a role for the state long meant arguing that fiscal and budgetary constraints were not as binding as once thought. Now that the problem of how to pay for things has been solved, we must face the question of how to do them (In that vein, the UK Government is considering setting up its own consultancy to avoid paying billions to external firms and to keep talent in house).

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