Central Bankers Are Too Strong. And Too Weak.



Are central bankers too strong or too weak? Unfortunately for the global economy, the answer is both: Their control of money is a blunt instrument that’s good for achieving some objectives, but worthless for others. Never has the disparity been clearer than now, with financial markets soaring on the back of easy monetary policy even as many lives are wrecked by the Covid-19 pandemic.

How central bankers should grapple with the paradox of their power and powerlessness was the theme of a 36-minute videoconference on Nov. 16 that was part of the Bloomberg New Economy Forum. The forum, which runs through Nov. 19, is organized by Bloomberg Media Group, a division of Bloomberg LP, the parent company of Bloomberg News.

When the only tool you have is a hammer, every problem starts to look like a nail. For central banks, the hammer is monetary policy, which involves—as the Federal Reserveputs it—“managing the level of short-term interest rates and influencing the availability and cost of credit in the economy.” The tool was essential earlier this year in preventing pandemic-related economic shutdowns from crashing the financial system. 

But while central banks can lend, they can’t make outright grants. While they can make overall financial conditions easier, they can’t direct funds to sectors, or segments of the public, that are in special trouble. To their credit, central bankers have recognized their limitations and called on the fiscal authorities to use the tools at their disposal. But governments have not entirely heeded the call. In the U.S., for example, Republicans and Democrats are deadlocked over a new coronavirus relief package.

Speaking at Bloomberg’s forum were three former central bank chiefs—Janet Yellen of the Fed, Raghuram Rajan of the Reserve Bank of India, and Mervyn King of the Bank of England—and Lawrence Summers, who was Treasury secretary in the Clinton administration. Moderating was Stephanie Flanders, a Bloomberg News senior executive editor and head of Bloomberg Economics.

If you like head shots of economists sitting in front of bookcases, this isthe video for you. Yellen, who went first, gotright to the point, that “monetary policy has its limits” and that fiscal relief is “essential.” (Fiscal policy covers spending and taxation, vs. monetary policy, which involves interest rates.) 

King said, “We have to get away from the idea that if anything goes wrong, central banks have to step in and throw money at the problem.”

Rajan, the only one of the four to focus on the problems of emerging markets, said, “There is no global leadership right now. Hopefully it will emerge.”

And Summers, who has breathed life into the Depression-era notion of “secular stagnation,” said the mistake for central bankers is “to vastly exaggerate their continuing relevance.” Now that central bankers in the rich, industrialized nations have already pushed interest rates about as low as they can possibly go, he said, they lack “the capacity to provide meaningful impetus to their economies.”

“The deep macro problem is that savings are exceeding the natural level of private investment,” Summers said. By accounting convention total savings must equal total investment, so when desired savings is greater than desired investment, something’s got to give. One of Summers’s preferred solutions is for the government to pick up the slack by increasing public investment, such as construction and repair of infrastructure.

Since central banks can whipsaw financial markets with the merest hint of an increase or decrease in interest rates, it’s easy to believe that central bankers are too powerful. In some ways, perhaps, they are. But central bankers themselves are all too aware of what they can’t accomplish.

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