Twilight of the Central Bankers

April 21st, 2016  |  Source: Strategy + Business

Mohamed A. El-Erian argues that the world’s masters of monetary policy have reached the peak of their ability to influence the course of the global economy.

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse

by Mohamed A. El-Erian, Random House, 2016

One of the more peculiar features of the past decade has been the transformation of a formerly quiet, behind-the-scenes cohort of central bankers into the most visible and consequential players in shaping the arc of the global economy.

Central banks’ star turn has sparked considerable controversy in many parts of the world. But as Mohamed El-Erian demonstrates in his deeply informed new book, The Only Game in Town, it is a role that cannot long be sustained and is likely coming to an end. To El-Erian’s credit, and to the frustration of those looking for simple answers, the author lays out a future path that is neither clear nor certain. We are headed, says El-Erian, to a turning point — a T-junction. Some countries will find a glide path toward greater self-sustaining prosperity free of aggressive central bank intervention; others will find themselves more deeply mired in sclerosis and crisis.

El-Erian repeatedly emphasizes that “the time has come for governments to recognize that they can no longer rely on central banks to do the heavy policy lifting.” After all, central banks did their job heroically and prevented the 2008–09 global crisis from transmogrifying into a global meltdown. They have spent the past seven years taking extraordinary and unconventional measures such as quantitative easing and negative interest rates, all in an attempt to bolster the world’s financial system and spur economic activity. The record charted by El-Erian has been mixed, largely because elected officials and governments in most countries have remained passive, fragmented, or misguided.

It would be hard to find a better guide to this perplexing landscape than El-Erian, an Oxford Ph.D. who has run some of the most prominent institutional investing organizations in the world (those of Harvard and PIMCO) and who is a frequent commentator and analyst. He tackles complex issues with a sharp focus, and provides not just an overview of how central banks worldwide have navigated the past decade, but also a road map of the current challenges and better processes for moving forward. While eschewing the temptation to provide a simple prediction for what lies ahead, he does explain what he sees as most likely (that T-junction) and suggests policy prescriptions for central banks and governments going forward.

El-Erian is surely right that for a set of institutions that have shaped the cost of capital for companies, the price of mortgages for consumers, and the supply of money for countries, central banks remain ill understood. In part that is because of their own legacy of what former Federal Reserve chairman Alan Greenspan called “purposeful obfuscation,” that tendency of central bankers to stay out of the spotlight and when placed in it to do their best to just mumble incoherently.

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