The Political Benefits of ‘Unconventional’ Monetary Policies in Times of Crisis

ABSTRACT

Since the global financial crisis burst in 2008, central bankers have been at centre stage in addressing its negative consequences across the economic systems of many countries. This has been further noticed in the aftermath of the pandemic crisis that erupted at the beginning of 2020 at global level, when a number of governments did intervene also in a rather ‘unconventional’ way to support economic activity through public spending. In both circumstances, central bankers have been in a position to satisfy private interests of the relevant stakeholders even though this has been affecting both income and wealth distribution against the common good. This paper investigates the political benefits that these ‘unconventional’ policy interventions have elicited in advanced economies to point out the political and distributional consequences of them, suggesting an alternative monetary policy stance that considers climate-related issues.

KEYWORDS:

• Central banking
• financial crises
• income distribution
• monetary policy

JEL CODES:

• E12
• E42
• E43
• E44
• E52
• E58

1. Introduction

Since the global financial crisis burst in 2008, central bankers have been at centre stage in addressing its negative consequences across a variety of advanced economies. This has been further noticed as a result of the pandemic crisis that erupted at the beginning of 2020 at global level, when a number of governments did intervene also in a rather ‘unconventional’ way to support economic activity through public spending. In both circumstances, central bankers have been in a position to satisfy private interests of the relevant stakeholders even though this has been much affecting both income and wealth distribution in favour of the richest people and several financial institutions. This paper investigates the political benefits that these ‘unconventional’ policy interventions have elicited in advanced economies to point out the political and distributional consequences of them across the global economy. In the next section, we provide a summary of central banks’ interventions in the aftermath of the global financial crisis, which originated in the United States as a result of the so-called subprime bubble that burst in 2006, which also elicited the euro-area crisis towards the end of 2009, after the newly elected Greek government declared that the public debt figures of that country had been fudged and in fact are much higher than announced by previous governments. The third section focuses on the distributional impacts of central banks’ interventions, pointing out also the political consequences of these interventions. The fourth section suggests an alternative monetary policy stance to address a number of negative political economy outcomes of ‘unconventional’ central banks’ decisions. The last section concludes by summarizing briefly the major issues that must be addressed in this regard on economic grounds, considering the likelihood that the proposed alternative monetary policy stance will be implemented in the existing political and financial frameworks across the global economy.

2. ‘Unconventional’ Monetary Policy Interventions Since the Global Financial Crisis

Central banks have become the focus of politics and mass media since 2008, when the global financial crisis erupted as a result of the bursting of the subprime bubble in the United States (see Rossi 2011, 2015, 2020). Since then, a large spectrum of politicians, particularly from the right-hand side of it, consider that central banks are in a position to save the economic system from both the global financial crisis and the pandemic crisis, without the need for national governments to increase their own expenditures. Through an unprecedented volume of ‘liquidity’ injected by central banks — which is assumed to ‘trickle down’ to the so-called ‘real economy’ — politicians and mainstream economists believe that an ultra-expansionary monetary policy can fix the most urgent problems, thereby kick-starting economic growth and thus contributing to the well-being of the population at large (see, for instance, Weale and Wieladek 2016; Boeckx, Dossche, and Peersman 2017; Cahn, Matheron, and Sahuc 2017; Del Negro et al. 2017; Rodnyansky and Darmouni 2017; Kuttner 2018). This echoes an analogous attitude that did emerge after the euro-area crisis with regard to so-called ‘fiscal consolidation’ (in fact, austerity) policies (see Mastromatteo and Rossi 2019). These policies were considered (and still are viewed) by right-wing politicians and mainstream economists as appropriate to induce real economic growth after a major crisis that affected the economy as a whole at national and global level (Alesina and Ardagna 2010; Reinhart and Rogoff 2010; Alesina et al. 2015; for a critique see Herndon, Ash, and Pollin 2014; Brambilla 2019). To be true, it is rather surprising, at first sight, that right-wing politicians and mainstream economists support simultaneously an expansionary monetary policy and a restrictive fiscal policy. In fact, this is not really astonishing, provided we consider who are the beneficiaries of these two (conflicting) policies, namely, the upper class of income and wealth owners — be they individuals, firms or financial institutions across the relevant territory — as pointed out by Rossi (2022a) with regard to Europe.

What mainstream economists consider ‘unconventional’ in monetary policy (see, for instance, Bernanke, Reinhart, and Sack 2004; Krishnamurthy and Vissing-Jorgensen 2011), in fact, is quite conventional from a heterodox point of view,¹ that is, the intervention of a central bank in support of, first, its banking system and, through the latter, of the economy as a whole. The perspective of such an intervention is, therefore, country-wide, as it is logical that a national central bank intervenes in the general interest of the country as a whole. The problems begin when one asks or has to define what corresponds to this ‘general interest’. At this stage, politics and lobby groups intervene and affect the definition of the ‘general interest’ to a large extent. Referring to ‘economic theory’ (as if only one theory were to exist in economic analysis), right-wing politicians and mainstream economists notice that ‘empirical evidence’ (which, in fact, is much debatable) shows that central banks should limit their interventions across the economic system by providing price stability on the market for produced goods and services — thereby ignoring not only the labour market and, hence, unemployment, but also any asset prices (that is, those of bonds, stocks, and real-estate objects) and thus also financial (in)stability issues (see Rochon and Rossi 2018; Rossi 2020, 2022b). This goes back to the essential definition of inflation, which is a loss of money’s purchasing power that exerts an upward pressure on a variety of prices depending on the contingent situation, even though the price index targeted by central banks does not reveal it necessarily (Rossi 2001 elaborates on that).

Be that as it may, central banks in so-called ‘advanced’ economies have displayed their huge ‘bazookas’ once the global financial crisis burst in 2008, after the demise of the investment bank Lehman Brothers in the United States. These ‘unconventional’ tools central banks put into practice were intended to support with mounting amounts of so-called ‘liquidity’ the level of economic activity through different transmission channels, namely the signalling (expectations) channel, the portfolio rebalancing channel,² the wealth channel, the fiscal channel, the banks’ balance sheet channel, the credit channel, the liquidity channel, and the monetary channel — the majority of them stemming from the interest rate channel (see for instance Bernanke, Reinhart, and Sack 2004; Ugai 2007; Shiratsuka 2010; Krishnamurthy and Vissing-Jorgensen 2011; Albert, Peñalver, and Perez-Bernabeu 2020). These channels are meant to have some impacts on a variety of stakeholders, from banks and non-bank financial institutions to firms and households, thereby affecting aggregate demand and eventually impacting on the price level as measured on the market for produced goods and services. This is indeed where central banks target price stability, which is generally their major, if not unique, policy goal — since the monetarist counterrevolution in the early 1970s, which became the orthodoxy by removing Keynesian policies from the general government sector of Western economies (see Rossi 2022c).

Beginning in the United States, where the global financial crisis emerged in 2008, the first ‘unconventional’ monetary policy intervention of central banks consisted in huge injections of liquidity through so-called ‘quantitative easing’ (QE),³ that is, large and impressive purchases of government bonds (later on also corporate bonds) from banks in trouble as a result of the crisis. In this regard, central banks have much enlarged the list of eligible assets that banks may use as a collateral in order for them to borrow from their central bank. In so doing, central banks have also reduced the so-called ‘hair cut’ on the most illiquid financial assets (both bonds and stocks), to increase the amount of liquidity that banks in trouble are thereby in a position to borrow from their central bank. This instrument also allowed national governments, particularly in the euro area, to finance their public deficits by issuing new government bonds that banks bought on the primary market, in order for the latter to obtain liquidity (in the form of central bank money) from their own central banks, thereby escaping the ‘no bail-out clause’ that forbids central bank purchases of government bonds in the primary market.

As a way to expand on this mechanism, central banks, particularly the Bank of Japan and the European Central Bank, have carried out ‘credit easing’ interventions, that is, edulcorated the conditions to be respected in order for a bank to provide a loan to any borrower. This concerns both the borrower’s financial capacity to support the interest rate and amortization plan and the lender’s capital and liquidity with regard to the loan granted by it. In particular, this ‘unconventional’ instrument allowed central banks to reduce the conditions to be fulfilled in order for banks to lend for what Werner (2012, p. 29) calls ‘GDP-based transactions’, which are meant to support economic activity and thereby to induce economic growth, possibly increasing also the employment level and fiscal revenue for the public sector.

At this stage one can already notice the influence of politics on and the ensuing political benefits of such ‘unconventional’ monetary policy interventions. As regards the former, the ‘no bail-out clause’ that forbids the ‘monetization’ of public deficits by the national central bank has been circumvented by QE programmes that induced banks to purchase government bonds on the primary market (where the central bank is forbidden to do so), in order for the latter to purchase these bonds on the secondary market — thus eventually financing the public sector deficit and providing liquidity to banks in need of it. This amounts to ‘killing two birds with one stone’, and moreover without making any noise, as everybody is happy with it apparently:

• banks are happy, because they can get from the central bank the liquidity they need and are unable to raise across the interbank market;

• governments are happy, because they can finance their deficits, moreover with lower interest payments than they would otherwise be asked to pay from the banking sector;

• firms are happy, because they are not asked to pay more taxes and can probably also sell more output than it would be the case without any such ‘unconventional’ tool;

• households are happy, because they are not asked to pay more taxes (particularly, rich households) or to suffer from a reduction of public expenditures (notably, the middle and lower classes) — and may also keep (or find) their job, without having to accept a reduction of their wage level (hence also of their standard of living, in case they cannot or do not want to borrow for that purpose) — since the public sector can implement income policies for helping the poor in difficulty because of the crisis;

• borrowers are happy, because they do not have to pay higher interest rates, and may even benefit from an interest rate reduction;

• lenders are also happy, since they much reduce the risk of bankruptcy and could also increase their earnings by expanding their lending volumes.

All these stakeholders are thus likely to be willing to re-elect the politicians in power,⁴ thereby making also them happy in an apparently ‘win-win’ situation, even though this implies some distributional issues (as notably pointed out by Colciago, Samarina, and de Haan 2019) — to be investigated in the next section.

Before investigating these issues, however, it is important to notice also that a negative interest rate policy (NIRP) as practiced, for instance, by the Swiss National Bank in the aftermath of the euro-area crisis — in order for it (to try) to limit the appreciation of the exchange rate of the Swiss franc against the euro (and possibly also against other major currencies, such as the US dollar and the pound sterling) — has also a distributional and, indirectly, a potentially disruptive effect on the real-estate market (see Rossi 2019). As a matter of fact, a NIRP induces banks to inflate the volume of mortgage loans in order to compensate on this market the interest rates they must pay on (part of) their deposits with the central bank. Further, such a policy also affects pension funds and other non-bank financial institutions, which inflate their real-estate purchases, in a way or another, to earn thereby what they are unable to earn on their deposits with the central bank. All these transactions across the real-estate market affect housing prices and, thereby, also income and wealth distribution. Indeed, this ‘asset price inflation’ favours those people and institutions that own real-estate objects, and impacts negatively on those individuals who will have to pay a higher price to rent their own living space, be it a flat or a house, or who want to buy a real-estate object and have to pay a higher price, thereby being in a position to own a smaller flat or house because of their limited purchasing power (as it occurs with middle-class households). This can also affect all those businesses that rent their commercial surfaces, such as local shops selling food or non-food goods — which already suffer from a lower purchasing power of middle-class wage earners, particularly as a result of the pandemic crisis that burst at the beginning of 2020. To be sure, when there is an evident lack of demand on the market for produced goods and services (as it is plain in times of crisis), firms are not willing to invest — to increase their production capacity — as they already have several problems in selling produced output. In these circumstances, a NIRP cannot induce these firms to invest and thereby to increase the employment level, but only has negative consequences for the economic system as a whole. These consequences include a higher financial fragility, particularly with regard to banks’ balance sheets and the real-estate market as explained above. While this credit bubble inflates, politicians are confident that their electorate (notably those individuals that benefit from such a bubble) continues to support them and is ready to renew their mandate, but once such a bubble bursts, things might change dramatically for a number of people and thereby induce a change at political level, with a radical change of the economic policy stance — with a urgent need of intervention to bail-out some banks in trouble, and a series of austerity policies — to rebalance the public sector’s budget — that affect people from the middle class negatively, generating thereby a vicious circle for the economy as a whole (see Mastromatteo and Rossi 2019).

Let us elaborate on these issues, focusing on the distributional impacts of central banks’ interventions in times of crisis.

3. Distributional Impacts of Central Banks’ Interventions in Crisis Times

Monetary policy decisions are never neutral, contrary to the monetarist claim that there exists a dichotomy between the ‘real’ and the ‘monetary’ sectors of the economy (see Rossi 2022c). All central banks’ interventions have a variety of effects across the whole economy, because they affect different economic variables owing to the transmission mechanism, which has an array of channels that operate in an often-interconnected way — and with overlapping consequences that cannot all be predicted correctly, owing to the complexity of an open economic system (see Carré 2015; Febrero and Uxó 2015).

The original, and largest, channel is the ‘interest rate channel’, which stems from the policy rates of interest (even at their zero-lower bound or below, as explained above).⁵ Interest rates are an important variable, and in fact are not the result of market forces — that is, supply and demand — as argued by mainstream economists, but stem from an administrative decision (see Lavoie 1996; Lavoie and Seccareccia 1999). This means that interest rates do not result from the alleged equilibrium between savings and the amount of investments, or from the equilibrium between the supply of money and the demand for it, but are influenced by the policy rates of interest, which banks and other financial institutions consider to add a mark-up that also depends on the relevant risks they enter into when lending to a particular borrower (see Rochon 1999). Hence, for a given amount that any bank decides to lend, the rate of interest depends on a series of variables, including the borrower’s solvency, the relevant time horizon as well as the contingent situation regarding the business cycle.

Now, when a central bank reduces the policy rate(s) of interest, it induces a number of financial and non-financial institutions to modify their spending behaviour in different ways. We already noticed that such a monetary policy decision does not induce firms to invest more, when there is a lack of aggregate demand on the product market. Rather, in such a case, firms may decide to borrow from the banking sector at a lower interest rate, in order for them to speculate across financial markets, where these firms’ managers are expecting to earn an income (rent) that they are unable to obtain on the goods market in light of the lack of aggregate demand. If so, then asset prices increase across financial markets (particularly for bonds and stocks), pushing other economic agents (including pension funds and wealthy people) to purchase financial assets, generating thereby what Greenspan (1996) famously called ‘irrational exuberance’ and that could end up in a bubble bursting similarly to the famous subprime story (and crash, as explained by Kindleberger 1978). In such a case, it is plain that the major losers are middle-class wage-earners, since the bursting of a financial bubble affects the economic system negatively, putting thereby a downward pressure on the wage level and the employment level of these categories of workers.

Before such a financial bubble bursts, however, there are some distributional effects of it that are worth considering, since they not only affect income and wealth distribution, but also impact largely on economic activity, fiscal revenue, and financial (in)stability. During the period when asset prices inflate as a result of a reduction in the policy rate(s) of interest, all economic agents that possess those financial assets whose prices increase will be (or feel) richer: some of them will, therefore, sell some or all of these assets, thus increasing their wealth in the form of bank deposits; some others will borrow in order to purchase other (similar) assets, with the expectation to become richer thereby; still other similar agents will increase their consumption spending, or buy real-estate objects using their financial wealth as collateral for obtaining mortgage loans at cheaper interest rates. Be that as it may, the large majority of these decisions will benefit wealthy people; only a tiny minority of them will also impact middle-class individuals positively, in case of an increase in consumption expenditures that is relevant enough in order for firms then to decide to increase production, thereby possibly hiring more people and/or increasing the wage level of middle-class workers. Yet, when this financial bubble bursts or when asset prices fall rapidly, the negative consequences of this event harm also those agents (particularly in the middle class) who did not benefit at all from inflating asset prices. It is thus a kind of ‘privatizing the benefits and socializing the costs’ of this phenomenon, which increases income and wealth inequalities at domestic and international levels that also impact on social cohesion, and therefore, political support, negatively over the long run. The mounting social turmoil and political riots that have been observed in a number of countries since the bursting of the global financial crisis in 2008 are clear signs of the negative impacts of such distributional consequences of both the crisis and the so-called ‘unconventional’ monetary policy interventions that were meant to address its negative effects across the financial and economic systems at global level.

It is, therefore, necessary to re-think monetary policy interventions afresh. Let us expand on this in the next section.

4. Rethinking Monetary Policy Interventions in the Aftermath of a Global Crisis

The global financial crisis that burst in 2008 and the global pandemic crisis erupted in 2020 provide the occasion to rethinking monetary policies anew. This has not occurred so far because of the political and distributional benefits that so-called ‘unconventional’ monetary policy interventions provide to a tiny minority of people (as explained above) who are powerful on both political and economic grounds and, therefore, in a position to make sure that their personal benefits are not cancelled. It is time now to consider these issues from a political economy perspective, and to have a monetary–structural reform of domestic payments systems that eradicates the origins of credit bubbles. Once these bubbles cannot occur anymore, central banks will not have to intervene with a series of ‘unconventional’ monetary policy tools, and the ensuing effects on income and wealth distribution will not occur anymore. Yet, politicians will benefit from such a reform, as it provides monetary and financial stability, hence also some benefits for politicians in power — since voting people will be in a less stressful situation and willing, therefore, to reappoint these politicians in an effective ‘win-win’ situation that really contributes to the common good, notably strengthening both monetary and financial stability for all stakeholders.

First of all, central banks must impose a ‘departmentalization’ of banks’ bookkeeping: similar to the 1844 Bank Act — which split the Bank of England books into two distinct departments (the Issue Department and the Banking Department) in order to display the two essentially distinct activities of the central bank (that is, the emission of money and the opening of credit lines; see Rossi 2015) — there should be a new ‘Bank Act’ in each country, whereby all banks ought to enter their operations in two separate departments, according to the nature of them: all emissions of money are to be recorded in the first department, whilst all provisions of credit are to be recorded in the second department (see Schmitt 1984, pp. 192–209). In so doing, the banks’ bookkeeping will reveal how much of the newly issued money by them refers to ‘GDP-based transactions’ (Werner 2012, p. 29), that is, has an original purchasing power because of its essential link to the payment of wages within the production process. As the monetary theory of production explains (see, for instance, Graziani 2003), indeed, money and production are two sides of the same phenomenon, that is, the former is the numerical expression of the latter and both exist as a result of firms paying the wage bill through a credit line that banks open to them (see Schmitt 1984; Cencini 1988, 1995; Rossi 2001). Now, when banks open credit lines for ‘non GDP-based transactions’ (Werner 2012, p. 29), this will appear in their ‘departmentalized’ bookkeeping in the form of newly-generated deposits that have no corresponding links with firms’ debt and wage-earners’ credit in the relevant banks’ accounts. This may be either forbidden or sanctioned by monetary authorities (or even by the banks’ shareholders, in so far as they sell their stocks, thereby signalling that the bank is affecting the money–output relation, hence generating inflationary pressures in either the real-estate or the financial markets). Be that as it may, this is enough to induce banks to avoid inflating credit (and financial) bubbles, contrary to what occurs with the so-called ‘Basel agreements’, which allow banks to expand their lending volumes even though they must comply with some stringent liquidity and capital requirements — once they have granted the volume of credit they consider profitable altogether. Thus, instead of acting ex-post and leaving in fact this decision to act to the banks themselves, such a monetary–structural reform provides an ex-ante constraint on banks’ decisions: if banks decide to open new credit lines for any transactions that do not increase national income (because they have no link to production activities), they must have enough deposits in their ledgers before entering into such an operation. In this case, banks work as financial intermediaries — as the conventional view puts it, according to which ‘deposits make loans’. By contrast, when a bank opens a credit line in order for a firm to pay the wage bill, this is a monetary intermediation in so far as it consists in the bank providing a loan that ends up in the formation of a new bank deposit to the benefit of wage earners — thus reversing the causality as far as ‘loans make deposits’ (Schumpeter 1954, pp. 1110–1117).⁶

Further, central banks can steer the volume of new loans that banks provide, by making sure the latter support a transition to a ‘green’ (that is, sustainable) economy, instead of supporting ‘brown’ (that is, unsustainable) activities such as in the oil or steel industries (see Rossi 2022d). The central banks’ support to ‘greening’ the economic system could occur along two distinct, but complementary, lines (see Volz 2017; Campiglio et al. 2018; Dafermos, Nikolaidi, and Galanis 2018; Chenet, Ryan-Collins, and van Lerven 2019; D’Orazio 2021; Schoenmaker 2021 for some alternative proposals; see D’Orazio and Popoyan 2022 for a comprehensive overview of G20 countries’ green central banking experiences in the past 20 years).

First, with regard to the fiscal channel pointed out above, central banks might purchase ‘green’ government bonds when the public sector sells them in order to finance those public expenditures that are environment friendly. These purchases of government bonds are not to be considered in the ‘no bail-out’ rule that currently forbids any kind of central bank financing of public deficits. These central banks’ purchases of ‘green’ government bonds might also be associated with lower rates of interest than the general government sector has to pay whenever it borrows from any commercial bank or non-bank financial institution, to incentivize it further to invest in ‘greening’ the national economy — once public authorities have precisely defined what are the criteria to be respected by an environment-friendly economic activity.

Secondly, central banks can support an ecological transition of their domestic economy by steering their policy rate(s) of interest to make sure that both firms and households in such an economy borrow from the banking sector with the purpose of ‘greening’ their own economic activities. As explained above, the variety of transmission channels that characterize monetary policy interventions, particularly with regard to the policy rate(s) of interest, affect different economic variables that, in a way or another, have an impact also on employment and price levels. To be sure, central banks may lower their policy rate(s) of interest (more) for those banks that support the ecological transition through their own lending strategies, thereby encouraging these banks to expand their lending volumes in this regard. Central banks can also increase their policy rate(s) of interest for those banks whose lending strategies are bad for the environment (see D’Orazio and Popoyan 2019; Svartzman, Dron, and Espagne 2019).

This monetary policy stance might also apply as regards banks’ investment strategies on financial markets at large. Banks that have ‘green’ assets in their portfolio may borrow at lower rates of interest from the central bank, whilst banks having ‘brown’ assets will have to pay a higher interest rate to borrow from it. The former banks might also benefit from a higher interest rate on their deposits with the central bank than this occurs for the latter banks — whose central bank deposits might be remunerated at a lower interest rate or even at a negative rate of interest that is thereby a penalty rate (see Rossi 2022d).

Further, once the banks’ lending strategies and asset portfolios are impacted by such an ‘unconventional’ monetary policy stance — with regard to the actual stance — they will also affect firms’ and households’ behaviour, through a variety of ‘sub-channels’ that form the monetary policy transmission mechanism. As regards firms, a ‘balance-sheet sub-channel’ can incentivize them to ‘greening’ the economic system: both their cash flows and the types of (‘green’ or ‘brown’) financial assets in their own portfolio can be impacted positively in connection to an appropriate ecological transition of all their own activities. For instance, those firms whose portfolio consists in a large proportion of ‘green’ assets may pay lower rates of interest when they borrow from any banks; by contrast, those firms whose portfolio contains a large share of ‘brown’ assets will have to pay higher interest rates when they ask banks to obtain new credit lines. The opposite might occur with regard to firms’ deposits with banks: the interest rate remunerating the firms’ savings in the form of bank deposit may be inversely related to the percentage of ‘brown’ assets in their own portfolio. This ‘asset price sub-channel’ concerns also the real-estate market, and thereby households, since the latter may own a real-estate object that is (not) compatible with ecological sustainability. Those households owning a real-estate object that is environment friendly benefit from an increase of its market price that may allow them to refinance their mortgage loans at a lower rate of interest, since their collateral (the real-estate object) represents a better guarantee for the lending bank. Those households owning a flat or a house that pollutes the environment (because of the oil it consumes, for instance), by contrast, will be affected negatively by a reduction in the market price of it, since they will have to pay a higher interest rate when they have to renew their mortgage loans. As time goes by, the increase in the number of ‘green’ real-estate objects and the reduction in the number of ecologically unsustainable ones will give rise to a ‘wealth effect’ that induces ‘green’ homeowners to increase their consumption expenditures, as they feel richer because of this asset price ‘sub-channel’.⁷ Eventually, this will support also the employment level, and possibly the wage level of middle-class workers — thereby reducing income and wealth inequalities, hence also the risk of inflating credit and financial bubbles whose bursting can induce a global crisis.

5. Conclusion

This paper has pointed out the political benefits of ‘unconventional’ monetary policies, as illustrated by central banks’ interventions in the aftermath of both the global financial crisis that burst in 2008 and the pandemic crisis that erupted in 2020. It explained that these interventions have exacerbated income and wealth inequalities within ‘advanced’ economies, since they have benefitted much more the upper class of individuals than the middle and lower classes. Indeed, even though one has to recognise that without these interventions the situation for middle-class and poor people would have been worse in the aftermath of the global financial crisis, these interventions inflate (real-estate and financial) asset prices, thereby providing a major factor of some future financial crises, particularly once monetary policies will be ‘normalized’ through increasing the policy rate(s) of interest that could also induce a mushroom growth of the number of non-performing loans so much that a systemically relevant number of banks will become financially fragile, originating a ‘bank run’ and eventually a banking crisis.

The analysis presented in this paper also suggested a reform of the banks’ bookkeeping, to make sure that banks do not (continue to) abuse of their lending capacity without any link to production activities, as only production generates money’s purchasing power. By separating money and credit explicitly in banks’ books, such a monetary–structural reform will make sure that banks must dispose of some pre-existent savings (in the form of bank deposits) whenever they want to open a credit line for ‘non GDP-based transactions’ (Werner 2012, p. 29). As a matter of fact, all these transactions, particularly across financial markets, do not generate income within the economy as a whole, and therefore, ought not to be financed with an ex-nihilo creation of money by banks. The ‘loans-make-deposits’ causality should be possible only for those transactions that give rise to national income, that is, for the payment of wages.

However, this reform will not be enough to make sure that economic activities become ecologically sustainable. To do so, central banks’ interventions must put into practice an interest rate policy that encourages ‘green’ investments and discourages ‘brown’ ones. The monetary policy instruments at their disposal are enough but must be re-oriented to make sure that all economic stakeholders behave in an environment-friendly way. This paper has suggested some possible lines of interventions in this regard. It is now up to politics to put these proposals into practice, knowing that an ecological transition is in the own interest of all (would be) elected politicians, too, as is the monetary–structural reform that we propose in this paper, since they will benefit personally of the monetary and financial stability that this reform provides at systemic level. Let us hope that for an increasing number of politicians these issues become prominent and induce them to act before too long.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Note, however, that some heterodox economists, such as Fiebiger and Lavoie (2021), consider these ‘unconventional’ monetary policies as inspired by monetarism, because they concern the direct ‘money channel’, that is, the transmission mechanism that monetarists consider operating between the monetary base (central bank money) and the total money supply. This is partly true but, as a matter of fact, these ‘unconventional’ monetary policies also operate through other channels, as this paper explains.

2 Initially, this channel means that banks sell their government bonds to the central bank and then buy these bonds again, so that the return on them decreases twice (one time with the first kind of transactions and another one with the second kind of transactions). If so, then the consequences of this channel are relevant for the whole economic system, since the return on government bonds decreases considerably: the public sector benefits from it, as it has lower interests to pay, but the losers are the government bond holders. For instance, retired people may lose part of their pension, when the latter is financed with the return on government bonds. However, this channel means also that banks sell government bonds, and then buy stocks or other assets to get higher returns, since the return on government bonds is decreasing. In that case, stock prices experience a boom: the winners are thereby wealthy people, namely, those with the highest share of stocks in their own portfolio. We owe this remark to an anonymous referee.

3 To be true, major central banks also entered into swap agreements between themselves, to make sure that their own banking systems could obtain all liquidity denominated in the relevant foreign currencies, as several interbank transactions are carried out across the foreign exchange market. We owe this remark to an anonymous referee.

4 This does not mean, of course, that central bankers will remain in power necessarily. However, in light of the fact that, in a number of countries, elected politicians appoint central bankers, if the former remain in office, the latter are likely to do the same, too. We owe this remark to an anonymous referee.

5 In this regard, notice that when the return on government bonds diminishes as a result of a reduction in the policy rates of interest, thereby reducing borrowing costs, debtors take advantage of such a situation while creditors lose from it. This induces a number of creditors to borrow from the banking sector to buy something, houses in particular, which can inflate a real-estate bubble as explained above. If rich people behave like this, they are in a position to take advantage of ‘unconventional’ monetary policies owing to the stock bubble, the housing bubble, and also the tax cuts (for rich people mainly) induced by the fiscal channel. These advantages for them are likely to be higher than the losses rich people may record with the decrease of bonds’ returns resulting from ‘unconventional’ monetary policies. All in all, both wealth and income inequalities increase thereby (even though the middle class benefits from such policies as regards the reduction of borrowing costs for home-ownership), because middle-class people suffer the increase of housing prices and do not benefit much from tax cuts and the stock prices bubble. For poor people this is even worse. We owe this remark to an anonymous referee.

6 This is the essential reason that makes the ‘Basel agreements’ a factor of financial instability and crisis. Hence, these agreements should be abolished, to be replaced by the monetary–structural reform proposed in this section, even though the highly financialized system characterizing advanced economies does not make such a reform easy to accept at political level and to implement in the existing financial framework.

7 To be sure, the fiscal channel explained in this paper can be used by the public sector to support research and development activities that are ‘green’, and for ‘green’ education of poor people. This could support the ecological transition and the creation of jobs for poor people during such a transition. Further, the public sector could invest in the construction of ‘green’ houses to lower their market prices and thereby to reduce the losses of poor people because of the housing bubble inflated by ‘unconventional’ monetary policies. We owe this remark to an anonymous referee.