Central banks ‘have never been on thinner ice’

Banks are in over their heads in trouble. Central banks are over their heads in trouble as well. The only thing left to bail them all out would be the IMF — which is within the realm of possibility as we enter a harsh downturn.


Sentiment at IMF annual meeting sours on Fed, BOJ, ECB

The global financial elite has soured on global central bank policy, believing that it’s now counterproductive, doing more harm than good.

That was the message on the sidelines of the International Monetary Fund’s annual meeting in Washington, where in informal survey of more than 100 bankers found more than 70% saying monetary policy is now part of the problem instead of a solution.

“The biggest problem that monetary policy makers face is…they’ve never been more powerful and more prestigious,” said Paul Tucker, a former Bank of England official now at Harvard University. “They’ve never known less — in our lifetimes, at least) about what is going on in the real economy, and therefore they’ve never been on thinner ice.”

Governments, Tucker said, are now content to sit on the sidelines knowing that central bankers will try stimulate economies through steps such as interest-rate setting and bond buying.

Being the only game in town, agreed former Bank of Israel head Jacob Frankel, is extremely dangerous. Keeping interest rates too low for too long, he said, “can create big problems, and they can come back to haunt us.”

Low interest rates weaken the financial sector, Frankel said, boosting low-productivity sectors and hurting overall output per hour of work. He urged the Federal Reserve to raise rates as soon as possible, saying “There is no question that by any criteria, the Fed should move.”

But monetary policy cannot deal with the main problems of the day — productivity, openness of markets and immigration, Frankel said.

Bank of Japan monetary policy was now somewhere between ineffective and counterproductive, Allianz Global Investors chief economic adviser Mohamed El-Erian said at a separate panel, while European Central Bank policy was somewhere between less-effective and ineffective.

There is growing recognition from economists that the remedies to slow growth “go well beyond central bank policies” but the political system is too polarized to move, El-Erian said. Central banks, he said, will not “walk away from a patient” — they’ll continue to provide medicine no matter the side effects.

Full article: Central banks ‘have never been on thinner ice’ (MarketWatch)

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