In a thought-provoking conversation with Tyler Cowen, Mark Carney, a renowned Canadian economist and former Governor of the Bank of England, delves into the significance of shared values in tackling complex issues like climate change and economic recovery post-COVID-19.
He also sheds light on the role of central banks in these scenarios and the necessity for innovation in monetary policy.
There was an absence of clear responsibility who’s responsible for it and empowering those who’s responsible. There’s a lot of finger pointing between the federal governments and the provincial government. – Mark Carney
Central banks can help financial institutions assess these types of risks and make informed decisions. – Mark Carney
Hierarchical Nature of Central Banks
The hierarchical nature of central banks is a significant challenge.
It is important to empower individuals within the organization to voice their opinions and give clear advice.
Central banks should also have Chief Operating Officers to handle the day-to-day operations.
Canada’s COVID-19 Response
Canada’s response to the COVID-19 pandemic highlighted issues with state capacity, including inadequate vaccine production capacity, insufficient supplies of personal protective equipment (PPE), and a slow vaccine rollout.
These issues stem from a lack of clear responsibility and coordination between federal and provincial governments.
Central Bank Digital Currencies (CBDCs)
Central bank digital currencies (CBDCs) could potentially disrupt the traditional banking system.
A two-tier system could be implemented, where the digital currency is primarily a wholesale digital currency, with individuals accessing it through a wallet provided by a commercial bank or fintech company.
Significance of Shared Values
Shared values and objectives are pivotal in addressing complex issues such as climate change and economic recovery from the COVID-19 pandemic.
Aligning values is particularly crucial when managing a central bank and serving as a public servant in a foreign country.
Central Banks and Climate Change
Central banks can significantly contribute to addressing climate change by evaluating the risk profile associated with it and collaborating with financial institutions to assess these risks.
They can also aid in understanding the asset price effect of climate change on commercial real estate, fossil fuel assets, and other investments.
Climate Change Mandate for Central Banks
Assigning a climate change mandate to central banks could potentially jeopardize their independence.
However, this depends on how the mandate is given and whether it aligns with the legal framework governing the central bank.
In the UK, the government has directed the central bank to consider climate change risk, which is consistent with the law.
Regulating Decentralized Finance (DeFi)
Regulation of decentralized finance (DeFi) should focus on know-your-customer and anti-money laundering measures, as well as the resilience of the institutions operating within DeFi. It is important to recognize the potential value of a combination of centralized and decentralized finance.
Crypto Exchanges Regulation
Crypto exchanges should be regulated in the same way as other exchanges and held to the same standards.
Even decentralized systems often need to interact with the centralized system to function as a true medium of exchange.
Absence of Populism in Canada
Canada’s emphasis on collective responsibility rather than an ‘us versus them’ approach has enabled the country to manage systemic risks and respond effectively to crises.
This mindset has contributed to the absence of populism in the country.
Economic Impact of Climate Change
The potential economic impact of climate change could be significant, with estimates of a base case of 5-6% of global GDP, with possible risks of up to 20-30%.
Central banks can use this information to assess the potential asset price effects of climate change on commercial real estate, fossil fuel assets, and other investments.
Central Banks’ Role in Climate Change
Central banks are not special adjudicators of wisdom about climate change.
Instead, they can use information about the potential economic impact of climate change to assess the potential risks to the financial system and take appropriate action.
Transition Risk in Focus
Transition risk refers to the risk associated with the shift towards a lower carbon economy.
Central banks can assist financial institutions in assessing these types of risks and making informed decisions.
For instance, the European auto industry will face significant transition risk as the sale of internal combustion engine vehicles will be banned in Europe after 2030.
