The key hypothesis
To crystallize our conversation today, allow me to use a very – and I stress very – clumsy sentence to summarize the current state of affairs: In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!
To translate this purposely awful sentence:
- Central banks have had to innovate and stretch policy tools and mandates, including the use of liquidity facilities and communication, to render less disorderly a set of fundamental multi-year economic and financial re-alignments.
- While initially successful – indeed, critical to avoid a global depression – the policy stance, both here in the United States and over the Atlantic in Europe, appears now to increasingly involve an unfavorable change in the balance between what Chairman Bernanke has labeled as the “benefits, costs and risks.”4
- Having built a bridge for other policymakers and for healthy balance sheets in the private sector, central banks must now hope that a more timely, comprehensive and effective response will finally be forthcoming (and push for it, as appropriate).
- Should this fail to materialize, central banks risk finding themselves having built expensive bridges to nowhere and, accordingly, will come under severe pressure with implications for the future of central banking itself, as well as for the welfare of economies at the national, regional and global levels.
- Meanwhile, the ripple effects from central bank policies will increasingly be felt in the functioning and, in some cases, viability of whole segments of the financial markets – thus adding to the need for both public and private entities to become more intellectually and operationally agile.
