Governing through Financial Markets: Central Banks and the Political Economy of Financialization

At the hybrid core of the financial system, public monetary governance and private market practices are entangled in a co-evolutionary relationship. On one hand, the implementation and transmission of monetary policy depend on private financial infrastructures. This dependence is a source of infrastructural power for private financial-sector actors. At the same time, their dominant position means central banks exert considerable influence on market institutions and structures. Based on this framework, this paper traces the co-evolution of central banking and financialization, understood here as the rise of shadow banking. Focusing on the US, the UK, the euro area, and China, we document the historical global shift from direct monetary policy instruments (such as interest rate ceilings, credit controls) towards indirect, market-based ones (such as repo transactions and asset purchases). This shift both validated and reinforced the marketization of financial intermediation and the growth of shadow money. We argue that the post-2008 institutionalization of central banks’ market-maker of last resort function has increased central banks’ infrastructural entanglement with both its fiscal counterparts and its financial-sector counterparties.