THE LEGACY OF MONETARY MANDARINS

History will not be kind to central bankers fixated only on the financial economy. It will also be critical of govts passing the hard decisions to such unelected technocrats

- SATYAJIT DAS

Central bankers are rarely out of the media. When not changing rates or announcing new infusions, they are jawboning markets and pontificating on economic conditions.

This prominence is recent. Building on the credibility of his predecessor, Paul Volcker, in controlling inflation, Alan Greenspan of the US Federal Reserve intervened after the October 1987 stock market crash despite little evidence of any threat to economic activity. The Bank of Japan interceded to deal with the aftermath of the 1990 collapse of the bubble economy.

The rulebook expanded after the 2001 dot-com problems and the 2007/8 financial crisis. The staple was interest rates. When they approached zero, central banks innovated with negative rates and implemented quantitative easing (QE), purchasing securities, government bonds, but later including mortgage-backed securities, corporate bonds, and shares, using newly created reserves.

Central banks implemented yield curve control (YCC) to target specific rates. Policymakers introduced financing arrangements to provide funds to banks to bolster liquidity and also on-lend to clients. Critics joked that central bankers would deploy these tools to even combat an alien invasion.

An analysis of these policies is unflattering. The effects on economic activity were inconclusive. Low rates and abundant money did not always convince households, some already heavily indebted, to take out new loans. Businesses proved reluctant to borrow to invest when demand was low.