If not at this week’s meeting of the European Central Bank’s governing council, then surely some time very soon; with euroland’s headline rate of inflation falling to just 0.7pc, the US economy showing signs of stalling anew, the Dow Jones correcting, and emerging markets in fresh turmoil, even the ultra-orthodox Jens Weidmann, president of the German Bundesbank, is finding it hard to resist pressure for ECB action to head off what now seems to be a clear and present danger of a deflationary eurozone.
A further cut in the benchmark interest rate, a negative deposit rate, another bout of credit easing – whatever route the ECB chooses seems to matter little so long as it is seen to be doing something. Once upon a time, it was to economic reformers in the political class that people looked for economic salvation; now in the absence of effective government it is to the supposedly superhuman powers of central bankers.
More or less everywhere, from Britain to America and Japan, and from Nigeria to India and Europe, central bankers have become the first, second, third and last line of defence for almost every economic problem that arises.
President Obama’s announcement of Janet Yellen as his choice as the new Federal Reserve chairman has prompted speculation about what this might mean for our central bank. Perhaps this can best be judged by reviewing its recent history and Yellen’s place in it.
It is also important to focus on the fact that the Federal Reserve is structurally flawed. The institution needs to be reformed to prevent Yellen, or any other future nominee, from using the enormous power of the Fed to aid and abet the allies of big government. I intend on using the Senate’s constitutional power of consent to nominations as a means to educate the American people on the structural flaws and policies of the Fed that are bankrupting our nation.
The world’s central banks have spent the past several years propping up the global economy and rescuing the world from crisis. Now, argues the head of the International Monetary Fund, it is time to grapple with the consequences.
The Federal Reserve, European Central Bank, Bank of Japan and other central banks have used a range of tools to try to spur growth and fight crises in their nations; the Fed, for example, is on track to soon own around $4 trillion in assets, up from $800 billion it held before the crisis.
Christine Lagarde, the managing director of the IMF, has been broadly supportive of these efforts, and stresses that they should only be unwound as economic conditions improve. But in a speech to leading central bankers and economists Friday at the annual economic symposium organized by the Kansas City Fed, she urged more reckoning with some of the less pleasant side effects for global finance, particularly the risk of bubbles and instability.
It is important, Lagarde said, “to communicate the risks on both sides of the equation—the risks to recovery from exiting too soon and the risks to financial stability from exiting too late.”
Central banks sold a record amount of US Treasury debt last week while bond funds suffered the biggest ever investor withdrawals as markets shuddered at the prospect of the US Federal Reserve ending its quantitative easing programme.
Holdings of US Treasuries held at the Fed on behalf of official foreign institutions dropped a record $32.4bn to $2.93tn, eclipsing the prior mark of $24bn in August 2007. It was the third week of outflows in the past four.
The debacle ignited by the Federal Reserve this week invites this question: What would have happened had Chairman Bernanke refrained from saying anything? He held on Wednesday one of his press conferences, announcing that, as the Associated Press put it, the Fed would likely slow its $85 billion-a-month program later this year and end it next year if the economy continued to strengthen. The stock market collapsed, and the value of the dollar soared — to more than a 1,300th of an ounce of gold at last check — and alarm is spreading.
Well, let it not be said that The New York Sun failed to warn of this kind of chaos. We did this a bit more than two years ago, in an editorial called “The Verbal Dollar.” It quoted a founder of TradeMonster.com, Jon Najarian, as warning Mr. Bernanke’s press conferences would ignite a “giant ramp up in volatility.” He reasoned that traders “react to one word removed from a paragraph in a policy statement” and remarked, “now he’s going to hold a press conference?” It reminded us that there had long been a tradition of silence among central banks, going back at least to the Bank of England.