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<\/a>Eco\u00adnom\u00adic pol\u00adi\u00adcy\u00admak\u00aders may have us, as the Talk\u00ading Heads put it in their 1985 hit, on the road to nowhere. [Cred\u00adit: qednet.biz]<\/p><\/div>For\u00admer Fed\u00ader\u00adal Reserve Chair\u00adman Ben Bernanke has been called the man who saved the world<\/a>. His extra\u00ador\u00addi\u00adnary inter\u00adven\u00adtions in the fall of 2008 have almost uni\u00adver\u00adsal\u00adly been rec\u00adog\u00adnized as hav\u00ading pre\u00advent\u00aded a sec\u00adond Great Depression.\n But a new study by the Swiss-based Bank for Inter\u00adna\u00adtion\u00adal Set\u00adtle\u00adments (BIS<\/span>) sug\u00adgests that Bernanke saved the world from a cri\u00adsis that was at least part\u00adly of his own mak\u00ading. Worse, it argues that the course he set and that his suc\u00adces\u00adsor Janet Yellen and oth\u00ader cen\u00adtral banks are fol\u00adlow\u00ading will pro\u00adduce anoth\u00ader and per\u00adhaps graver crisis.<\/p>\n Gov\u00adern\u00adment mon\u00ade\u00adtary and fis\u00adcal pol\u00adi\u00adcy\u00admak\u00aders have lost their way, the BIS<\/span> argues. So bad\u00adly that they don\u2019t just need a new direc\u00adtion. They need a new compass.<\/p>\n <\/p>\n Draw\u00ading heav\u00adi\u00adly on the past work of the head of the BIS\u2019s Mon\u00ade\u00adtary and Eco\u00adnom\u00adic Depart\u00adment Clau\u00addio Borio, the organization\u2019s annu\u00adal report blames pol\u00adi\u00adcy blun\u00adders by fis\u00adcal and mon\u00ade\u00adtary offi\u00adcials in the gov\u00adern\u00adments of advanced economies for the Great Recession.<\/p>\n The pro\u00adlogue to the Great Reces\u00adsion is well known. A major finan\u00adcial boom devel\u00adoped against the back\u00addrop of low and sta\u00adble infla\u00adtion, tur\u00adbocharged, as so often in past such episodes, by finan\u00adcial inno\u00adva\u00adtion. Cred\u00adit and prop\u00ader\u00adty prices soared, shrug\u00adging off a shal\u00adlow reces\u00adsion in the ear\u00adly 2000s and boost\u00ading eco\u00adnom\u00adic growth once more. Spir\u00adits ran high. There was talk of a Great Mod\u00ader\u00ada\u00adtion \u2013 a gen\u00ader\u00adal sense that pol\u00adi\u00adcy\u00admak\u00aders had final\u00adly tamed the busi\u00adness cycle and uncov\u00adered the deep\u00adest secrets of the econ\u00ado\u00admy (p. 10<\/a>).<\/p><\/blockquote>\n But the Great Mod\u00ader\u00ada\u00adtion abrupt\u00adly gave way to fears of a Great Depres\u00adsion, fears that sparked the mon\u00ade\u00adtary and fis\u00adcal impro\u00advi\u00adsa\u00adtions of 2008 that \u201cpre\u00advent\u00aded the finan\u00adcial sys\u00adtem and the econ\u00ado\u00admy from plung\u00ading into a tail\u00adspin\u201d (p. 11).<\/p>\n Once the worst of the cri\u00adsis had passed, the Fed and oth\u00ader gov\u00adern\u00adment agen\u00adcies failed to piv\u00adot from cri\u00adsis man\u00adage\u00adment to cri\u00adsis res\u00ado\u00adlu\u00adtion, the BIS<\/span> argues. They did not address the prob\u00adlems that were both the cause and effect of the bust with the bit\u00adter med\u00adi\u00adcine of debt reduc\u00adtion and price dis\u00adcov\u00adery. Instead they fell back on tra\u00addi\u00adtion\u00adal pol\u00adi\u00adcy bro\u00admides \u2013 heavy gov\u00adern\u00adment bor\u00adrow\u00ading (deficits) and accom\u00admoda\u00adtive mon\u00ade\u00adtary pol\u00adi\u00adcy (zero inter\u00adest rates and asset pur\u00adchas\u00ades) \u2013 that have stunt\u00aded eco\u00adnom\u00adic recov\u00adery and threat\u00adened future crises. Hav\u00ading not learned from their errors, they seem deter\u00admined to repeat them.<\/p>\n In no small mea\u00adsure, the caus\u00ades of the post-cri\u00adsis malaise are those of the cri\u00adsis itself \u2013 they lie in a col\u00adlec\u00adtive fail\u00adure to get to grips with the finan\u00adcial cycle. Address\u00ading this fail\u00adure calls for adjust\u00adments to pol\u00adi\u00adcy frame\u00adworks \u2013 fis\u00adcal, mon\u00ade\u00adtary and pru\u00adden\u00adtial \u2013 to ensure a more sym\u00admet\u00adri\u00adcal response across booms and busts. And it calls for mov\u00ading away from debt as the main engine of growth. Oth\u00ader\u00adwise, the risk is that insta\u00adbil\u00adi\u00adty will entrench itself in the glob\u00adal econ\u00ado\u00admy and room for pol\u00adi\u00adcy maneu\u00adver will run out. (p. 8)<\/p><\/blockquote>\n The BIS<\/span> cri\u00adtique draws a sharp dis\u00adtinc\u00adtion between busi\u00adness cycles \u2013 which aver\u00adage 1 to 8 years<\/a> in length \u2013 and the booms and busts asso\u00adci\u00adat\u00aded with finan\u00adcial cycles, whose time\u00adframe is longer and whose peaks and troughs are more pro\u00adnounced. Gov\u00adern\u00adments tend to focus on the busi\u00adness cycle, treat\u00ading reces\u00adsions with big\u00adger deficits and low\u00ader inter\u00adest rates that are thought to induce eco\u00adnom\u00adic growth and reduce joblessness.<\/p>\n Those poli\u00adcies have fall\u00aden flat in the near\u00adly six years that have passed since the Lehman Broth\u00aders bank\u00adrupt\u00adcy. \u201cThe post-cri\u00adsis peri\u00adod,\u201d the BIS<\/span> says, \u201chas been dis\u00adap\u00adpoint\u00ading,\u201d char\u00adac\u00adter\u00adized by a \u201cslow and weak recov\u00adery,\u201d unem\u00adploy\u00adment \u201cwell above pre-cri\u00adsis lev\u00adels,\u201d and the grim real\u00adi\u00adty that \u201cwe have not made up lost ground\u201d (p. 8). \u201cThe longer term out\u00adlook for growth,\u201d mean\u00adwhile, \u201cis far from bright,\u201d large\u00adly because of dis\u00adap\u00adpoint\u00ading pro\u00adduc\u00adtiv\u00adi\u00adty growth on top of a longer-term trend decline (p.9). Gov\u00adern\u00admen\u00adt\u2019s fix\u00ada\u00adtion on stim\u00adu\u00adlat\u00ading demand at the expense of increas\u00ading out\u00adput is in part to blame for the tepid recovery.<\/p>\n There is some good news, the report acknowl\u00adedges. Infla\u00adtion remains low, fears of defla\u00adtion have not mate\u00adri\u00adal\u00adized (though they per\u00adsist in the euro\u00adzone), and \u201cfinan\u00adcial mar\u00adkets have been exu\u00adber\u00adant over the past year, at least in advanced economies, danc\u00ading main\u00adly to the tune of cen\u00adtral bank deci\u00adsions\u201d (p. 9).<\/p>\n That exu\u00adber\u00adance doesn\u2019t square with eco\u00adnom\u00adic real\u00adi\u00adty. \u201cIt is hard to avoid the sense of a puz\u00adzling dis\u00adcon\u00adnect between the mar\u00adkets\u2019 buoy\u00adan\u00adcy and under\u00adly\u00ading eco\u00adnom\u00adic devel\u00adop\u00adments glob\u00adal\u00adly\u201d (p. 9).<\/p>\n Glob\u00adal finan\u00adcial mar\u00adkets, the report says, are lev\u00adi\u00adtat\u00ading \u201cunder the spell of mon\u00ade\u00adtary pol\u00adi\u00adcy\u201d (p. 23). That pol\u00adi\u00adcy con\u00adtin\u00adues to favor increased debt over bal\u00adance sheet repair (debt reduc\u00adtion). Enabled by loose mon\u00ade\u00adtary pol\u00adi\u00adcy, the total debt of pri\u00advate non-finan\u00adcial sec\u00adtors has risen glob\u00adal\u00adly by 30 per\u00adcent since the cri\u00adsis, while the pub\u00adlic sec\u00adtor debt-to-GDP ratio of G7<\/span> coun\u00adtries has grown by near\u00adly 40 per\u00adcent over that span (p. 9).<\/p>\n It is pre\u00adcise\u00adly this debt, along with increased prop\u00ader\u00adty prices, that exac\u00ader\u00adbate the boom phase of the finan\u00adcial cycle, accord\u00ading to a Decem\u00adber 2012 BIS<\/span> paper<\/a>,<\/span> lead\u00ading to big\u00adger and more dev\u00adas\u00adtat\u00ading busts (p.2). The effects of these busts are, as we are learn\u00ading, very dif\u00adfi\u00adcult to shake off.<\/p>\n To rem\u00ade\u00addy this, the report argues, gov\u00adern\u00adments should pur\u00adsue coun\u00adter\u00adcycli\u00adcal mon\u00ade\u00adtary, fis\u00adcal and reg\u00adu\u00adla\u00adto\u00adry poli\u00adcies that lean against booms and reserve more accom\u00admoda\u00adtive poli\u00adcies for respond\u00ading to busts.<\/p>\n The over\u00adall strat\u00ade\u00adgy for nation\u00adal pol\u00adi\u00adcy frame\u00adworks should be to ensure that buffers are built up dur\u00ading a finan\u00adcial boom so that they can be drawn down in the bust. Such buffers would make the econ\u00ado\u00admy more resilient to a down\u00adturn. And, by act\u00ading as a kind of sea anchor, they could also damp\u00aden the boom\u2019s inten\u00adsi\u00adty. Their effect would be to make pol\u00adi\u00adcy less pro\u00adcycli\u00adcal by ren\u00adder\u00ading it more sym\u00admet\u00adri\u00adcal with respect to the boom and bust phas\u00ades of the finan\u00adcial cycle. This would avoid a pro\u00adgres\u00adsive loss of pol\u00adi\u00adcy room for maneu\u00adver over time (p. 19).<\/p><\/blockquote>\n Instead, gov\u00adern\u00adments have pur\u00adsued fis\u00adcal and mon\u00ade\u00adtary poli\u00adcies ill-suit\u00aded both to booms and busts. Fis\u00adcal pol\u00adi\u00adcy, the report observes:<\/p>\n lags fur\u00adthest behind. There is lit\u00adtle recog\u00adni\u00adtion of the huge flat\u00adter\u00ading effect that finan\u00adcial booms have on the fis\u00adcal accounts: they cause poten\u00adtial out\u00adput and growth to be over\u00ades\u00adti\u00admat\u00aded, are par\u00adtic\u00adu\u00adlar\u00adly gen\u00ader\u00adous to the fis\u00adcal cof\u00adfers, and mask the build-up of con\u00adtin\u00adgent lia\u00adbil\u00adi\u00adties need\u00aded to address the con\u00adse\u00adquences of the busts\u2026Similarly, there is scant appre\u00adci\u00ada\u00adtion of the lim\u00adi\u00adta\u00adtions of an expan\u00adsion\u00adary fis\u00adcal pol\u00adi\u00adcy dur\u00ading a bal\u00adance sheet reces\u00adsion; indeed, the pre\u00advail\u00ading view is that fis\u00adcal pol\u00adi\u00adcy is more effec\u00adtive under such conditions.<\/p><\/blockquote>\n Nor are cen\u00adtral banks prop\u00ader\u00adly cal\u00adi\u00adbrat\u00ading mon\u00ade\u00adtary pol\u00adi\u00adcy. The Fed that kept inter\u00adest rates too low for too long and there\u00adby helped pro\u00adduce the real estate bub\u00adble has respond\u00aded to the burst\u00ading of that bub\u00adble with quan\u00adti\u00adta\u00adtive eas\u00ading and near-zero rates that have last\u00aded more than 5\u20131\/2 years and are pro\u00adject\u00aded to con\u00adtin\u00adue at least into 2015 and per\u00adhaps beyond. The Fed fears rais\u00ading those rates, cit\u00ading the risk of mon\u00ade\u00adtary tight\u00aden\u00ading amid tepid eco\u00adnom\u00adic growth and ele\u00advat\u00aded unem\u00adploy\u00adment. That deci\u00adsion could prove every bit as wrong-head\u00aded as the accom\u00admoda\u00adtive poli\u00adcies that helped pre\u00adcip\u00adi\u00adtate the Great Reces\u00adsion, accord\u00ading to the BIS<\/span>.<\/p>\n Mon\u00ade\u00adtary pol\u00adi\u00adcy \u2026 has been over\u00adbur\u00addened for too long. After so many years of an excep\u00adtion\u00adal mon\u00ade\u00adtary expan\u00adsion, the risk of nor\u00admal\u00adiz\u00ading too slow\u00adly and too late deserves spe\u00adcial atten\u00adtion (p. 20).<\/p><\/blockquote>\n Those risks are real and ominous.<\/p>\n The risks of fail\u00ading to act should not be under\u00ades\u00adti\u00admat\u00aded. The glob\u00adal econ\u00ado\u00admy may be set on an unsus\u00adtain\u00adable path. And at some point, the cur\u00adrent open glob\u00adal trade and finan\u00adcial order could be seri\u00adous\u00adly threat\u00adened. (p. 20)<\/p><\/blockquote>\n Pre\u00adserv\u00ading that order requires tak\u00ading polit\u00adi\u00adcal\u00adly dif\u00adfi\u00adcult decisions.<\/p>\n There is lit\u00adtle appetite for tak\u00ading the long-term view. Few are ready to curb finan\u00adcial booms that make every\u00adone feel illu\u00adsive\u00adly rich\u00ader. Or to hold back on quick fix\u00ades for out\u00adput slow\u00addowns, even if such mea\u00adsures threat\u00aden to add fuel to unsus\u00adtain\u00adable finan\u00adcial booms. Or to address bal\u00adance sheet prob\u00adlems head-on dur\u00ading a bust when seem\u00ading\u00adly eas\u00adi\u00ader poli\u00adcies are on offer. The temp\u00adta\u00adtion to go for short\u00adcuts is sim\u00adply too strong, even if these short\u00adcuts lead nowhere in the end (p. 21).<\/p><\/blockquote>\n The BIS<\/span> report offers this unwel\u00adcome piece of advice to eco\u00adnom\u00adic pol\u00adi\u00adcy\u00admak\u00aders who are, as David Byrne<\/a> once sang, on the road to nowhere: get a new compass.<\/p>\n","protected":false},"excerpt":{"rendered":" For\u00admer Fed\u00ader\u00adal Reserve Chair\u00adman Ben Bernanke has been called the man who saved the world. His extra\u00ador\u00addi\u00adnary inter\u00adven\u00adtions in the fall of 2008 have almost uni\u00adver\u00adsal\u00adly been rec\u00adog\u00adnized as hav\u00ading pre\u00advent\u00aded a sec\u00adond Great Depres\u00adsion. But a new study by \u2026 Con\u00adtin\u00adue read\u00ading