Finding the saviours before the next economic turmoil
IMF needs to be empowered again to get the work done
Diagnosis is easy; response is much harder. I propose a new standard: Anyone noting a slowdown in major economies or predicting a recession is expected to also suggest how officials should respond.
The doomsayers keep pointing out that there’s less scope to reduce interest rates and unleash fiscal stimulus than in 2008 or 2001. So if not those tools, what should follow the inevitable next slump?
The European Central Bank went some way toward confirming the diagnosis of a meaningful slowdown — at least outside the US — and going a step further by at least implying what the ECB would do about it. First, ECB President Mario Draghi confirmed the end of quantitative easing this year. Then he spent his press conference essentially apologising for ending that particular stimulus programme.
How can he take a step and say why he doesn’t feel great about doing so? His verbal gymnastics to describe the economic landscape included gems like “continued confidence with increasing caution”. He talked about “lower growth but not low growth.”
Draghi was pressed on what the ECB could do if there is a downturn. Apparently QE is no longer seen as a risky one-off. Draghi said: “It’s permanent. It’s something that may be considered usable in contingencies.”
Reprise of the near past
Maybe the future of monetary policy is a reprise of the near past. Forward guidance will play perhaps a bigger role, and reinvesting proceeds from maturing bonds will continue to deliver benefits of that stimulus without pouring in new money.
Across the Atlantic, former Federal Reserve chair Janet Yellen offered some ideas at the Brookings Institution a few months ago. Negative interest rates in the US are very tough.
Why not just pledge in very robust terms that interest rates will stay lower for longer after being reduced to zero? It sounds like a more muscular version of what the Fed already did.
Current and former officials like Draghi and Yellen are speaking for what individual central banks can do. But the next slump, whenever it comes, will most likely require a global response. Capital flows are more connected than ever. Technology and trade now enable a sea of money to slosh around the planet. It may no longer be realistic to think of a singular saviour — be it the International Monetary Fund, which traditionally has served as the global safety net, or the Fed, which swooped in after the 2008 crisis with its own quantitative easing stimulus programme and an array of dollar swap agreements with major economies.
The need for a broader response was emphasised by a group of monetary elders assembled by the Group of 20 to tackle the challenge. They noted that firefighting resources are now fragmented.
The IMF once accounted for about 90 per cent. Now, according to former ECB president Jean-Claude Trichet, the fund holds significantly less than that. IMF intervention in crises is important, but linking regional lenders and backstops to the IMF is a greater need, Trichet told the Council on Foreign Relations. It’s one key proposal for this moment, before the next slump: We don’t need new institutions, but existing ones will need to work more closely together.