By Paolo von Schirach
June 24, 2013
WASHINGTON – The Basel based Bank for International Settlements, BIS, in its annual report admonished central bankers in the US, Europe and Japan. They should go back to worrying about monetary issues, leaving economic policies to governments. I couldn’t agree more. Indeed, I had pointed out (see link above to a related piece) that central bankers have become (by default, not by design) the chief economic policy makers in the US, in Europe and to a large extent in Japan.
Bernanke stepped into a policy vacuum
In the US, lack of political consensus on any economic agenda means policy paralysis in Washington. Well, clearly with good intentions, Fed Chairman Ben Bernanke stepped into this vacuum trying his best to revive the economy, using the tools he has. He tried to re-energize America by keeping interest rates artificially low, this way creating incentives for people and institutions to buy stocks. The whole idea was to direct funds into productive enterprises. A new flurry of investment activity, in turn, was supposed to create new enterprises, this way adding to employment. (In a somewhat different context, Draghi tried the same regarding the Eurozone).
Fed-dependent Wall Street rally
Well, the results of all this Fed activism are modest. Sure, US unemployment is down, but only by a little bit. (From 8.1% to 7.6%). However, it is clear that the Fed sustained actions and signals have ecouraged a major stock market rally that is not supported by economic fundamentals. Investors put money in stocks mostly because the Fed provided strong disincentives to invest in other instruments. The unintended consequence of a Fed-dependent Wall Street is that when Bernanke recently indicated that the Fed might –just might– slowly change course, investors got scared and sold. Hence a significant, (even though not disastrous), Wall Street sell off.
BIS: go back to monetary issues
Anyway, whatever the near or medium term consequences of all this central banks’ activism, the old fashioned BIS just gave some old fashioned advice. Central bankers should stick with their key mandate: monetary stability. Leave to elected policy makers the task of dealing with the creation or modification of macroeconomic incentives. In principle, this is rather basic, intuitively obvious, sound advice. But it is not likely that Bernanke, Mario Draghi and Bank of Japan Governor Haruhiko Kuroda will follow it.
Lacking any meaningful new plan from Washington or Brussels Bernanke and Draghi will continue to do what they are doing, this way providing oxygen to anemic markets, even though they know full well that their “remedies” are no real substitutes for government led changes in fiscal, tax and other key policies. On a somewhat different level, BOJ Governor Kuroda is now essentially, even though not formally, part of the Japanese executive branch. And so he will follow Prime Minister Abe’s orders.
Where are the elected leaders?
Be that as it may, the unfolding scenario is rather uninspiring. We have the major economic building blocs of the post war West, (the US, Europe and Japan), in the grips of serious systemic problems that manifested themselves in excessive public spending, mounting debt, little innovation, slow growth and high unemployment.
Unfortunately, governments seem to be paralysed, (with the exception of Japan that just launched a major plan aimed at fueling economic renaissance). While governments are paralysed, central bankers in Washington and Frankfurt do their utmost to keep things moving. Noble goal, but eventually unsustainable, while the execution of these policies caused other problems, such as inflated stock market valuations.
It is time for elected leaders to actually step in and lead. However, with Japan’s notable exception, (leaving aside whether or not Abe’s policies will eventually work out), I see no action.