Good article in the WSJ here describing where we are at in the current financial crisis and how a band of merry men from the MIT are in essence “experimenting” with the global economy.
Central bankers around the world were always important but over the last few years there words and actions have been poured over again and again by investors while they attempt to tinker with monetary policy to try and rescue the world financial system. I don’t like the use of the word experiment as it conjures up images of puppets on a string but we are in untested waters whereby the amount of money being pumped into the system has reached uncharted territory across all the major economies of the world USA, EU, UK and Japan.
I certainly would not fancy their job, pretty thankless in nature, and most of what you will read is akin to a rotund man with a beer in one hand a remote in the other shouting at professional athletes as to what “they should be doing.”
Here are the two main conundrums they are facing in short: Together the main central bankers have thrown enough money at the problem to try and make it go away ( We are talking trillions here ). To go away, we need that money to find its way into the economic system in terms of demand for loans from small to medium businesses. This demand has not been stimulated enough yet in my mind for two reasons: Most are still reeling from the effects of the credit crunch and the period of over use of debt as a financing tool, lessons have been learnt and if you are lucky enough as a business to be still standing the principle of once bitten twice shy may be hampering demand for credit. The second is throwing money at a problem does not make it go away and can sometimes make things worse. It is the structural issues in each country’s economy that need to be addressed, each country being unique as to their requirements. A one size fits all solution will not work across a diversified global economy. Central bankers hands are tied, as on the face of it at least they need to maintain a position of independence from both banks and politicians to preserve their integrity. So without this political power they cannot address the structural issues that affect their economy, it does not even fall in their mandate.
The second issue they face is the repercussions of all this easy money they have put into the system, as I addressed yesterday this could cause an inflationary spiral of epic proportions, but on the other hand a withdrawal too soon or too sharp could lead to a deflationary death death spiral just as fierce.
I’m not saying “hug a central banker” here but I do appreciate the difficulties of their jobs, and really there are about 4-5 key people in the world right now that have the future of the economy in their hands. As this article states lets hope they do not look back on their legacy and say “did I do too much or too little” lets hope they get it just right.
Absolutely worth a read to better understand the role of the central bankers club.