If nothing else, the term central banker is more than apt. Taking flak from both the left and the right, the global chiefs of monetary policy are stuck in the middle and singled out for scorn for both doing too much and doing too little.
True, the criticism comes with the job, and in many cases is more than warranted. But monetary policy can only do so much. Both at home and abroad, real solutions to the world’s economic woes won’t come out of the Federal Reserve or the European Central Bank. They’ll come from the fiscal policymakers — the politicians — and that’s why yields on Treasurys and German bunds and Japanese sovereign debt are sounding once unfathomable lows.
The market hates uncertainty, and whether it’s the looming “fiscal cliff” in the U.S. or a revolutionary rethinking of the euro experiment, is it wrong to have little faith in timid, squabbling policymakers?
Yes, it’s both fashionable and fun to pour opprobrium on “Helicopter” Ben Bernanke regardless of what he does. But when the Federal Reserve chairman led the charge to a zero interest rate policy, wags pronounced the end of Fed action. The central bank, it was said, was out of bullets.
Well, hardly. After two rounds of quantitative easing and Operation Twist, the Fed is firing weapons once unthinkable as part of a monetary arsenal. And yet, according to critics on either side, it’s both too much and too little. High unemployment, they say, is solely the Fed’s fault.
Meanwhile, the recessions spreading across Europe do make a good case that the U.K. and the ECB didn’t cut rates by enough, raised them too quickly and are now keeping them too high. But it’s also true that such actions are most effective — and perhaps only effective — when paired with coordinated fiscal policy.
Indeed, Bernanke and his ECB counterpart, Mario Draghi, are all but begging the people with the true power — the policymakers — to take bold action. In his testimony before Congress Thursday, Bernanke once again warned of the drag on the recovery being exerted by fiscal policy.
“Real spending by state and local governments has continued to decline,” Bernanke said. “Real federal government spending has also declined, on net, since the third quarter of last year, and the future course of federal fiscal policies remains quite uncertain.”
Meanwhile, the economy is hurtling toward the fiscal cliff, and no one in Washington is in the diver’s seat.
“Monetary policy is not a panacea,” Bernanke said. “I would be much more comfortable if Congress would take some of this burden from us.”
Draghi, meanwhile, faces even more formidable challenges. Bailing out Spain’s banks will buy the eurozone some more time. But the hard choices, requiring huge compromises on the part of Germany and the weaker eurozone nations, are ultimately out of the ECB president’s hands.
“I do not think it would be right for monetary policy to compensate for other institutions’ lack of action,” Draghi has said.
Make fun of Bernanke and Draghi all you like — but they’re right. If nothing short of a central authority with control over the budgets of member states — seemingly a political impossibility — can make the euro work, then what’s a central banker to do?
This is why economist and Nobel laureate Joseph Stiglitz says anyone counting on monetary policy to get us out of this mess is just “wrong.” This is why Martin Wolf, the Financial Times’ esteemed economics commentator, wrote: “Before now, I had never really understood how the 1930s could happen. Now I do.”
Investors’ panicked rush into Treasurys and other solid sovereign debt indicates a deep aversion to the downside risks, Wolf says. “Policy makers must eliminate this panic, not stoke it.”
The crisis is now beyond the power of monetary policy. It’s in the hands of the policymakers — the elected officials in democratic nations both here and abroad. In the U.S. and Europe, we have met the enemy, and he is us.
