Speaker 1: Welcome to on Blocks. I'm Tracy Alloway. Joe Wisenthal is
Speaker 1: away today, but don't worry because I have with me
Speaker 1: here a very able and capable replacement co host. It is,
Speaker 1: of course, Dan Moss. He's executive editor of Economics for
Speaker 1: Bloomberg News and he's also the co host of another
Speaker 1: Bloomberg podcast, Benchmark. Dan, thanks for being here. It's really
Speaker 1: great to be here, all right. So Dan and I
Speaker 1: have a treat for our listeners today. We have with
Speaker 1: us here in the studio, Muhammad el Arian. He's a
Speaker 1: Bloomberg View columnist. He's chair of President Obama's Global Development Council,
Speaker 1: he's chief economic advisor at Alliance, and he's also a
Speaker 1: prolific writer. I'm pretty sure he writes more than full
Speaker 1: time journalists, which is pretty anyway. That's right, and he
Speaker 1: also has a new book out which feeds directly into
Speaker 1: what we're actually going to talk about today. That's right.
Speaker 1: Today going to be talking about central banks and the
Speaker 1: extraordinary influence they wielded not just on markets but on
Speaker 1: the economic life of nations since the financial crisis. The
Speaker 1: secondary question is whether they are running out of ammunition,
Speaker 1: whether their influence is diminishing, or as a colleague of
Speaker 1: ours has put it, whether they've become impotent. And on
Speaker 1: that note, it's a really good time to talk about it,
Speaker 1: because just last week we had the European Central Bank
Speaker 1: announced a whole raft of new stimulus measures, and we
Speaker 1: didn't necessarily see the market reaction we might have expected.
Speaker 1: So this question, oh Dan's disagreeing with me. The initial
Speaker 1: market reaction was quite powerful because they frontloaded a lot
Speaker 1: of the announcement. Typically, the ECB goes for the rate
Speaker 1: announcement and then anything on QUEI or special ops has
Speaker 1: had to wait for drugs press conference. They went out
Speaker 1: of the gate at seven forty five New York time,
Speaker 1: and out of the gate strong. I think Tracy Markets
Speaker 1: retraced that in initial move because they heard something else
Speaker 1: from him, which is that interest rates won't go much lower,
Speaker 1: and they appeared to listen, all right, we're going to
Speaker 1: talk so much more about that, but before we do,
Speaker 1: I want to set the scene a little bit. I
Speaker 1: want to go back in time to the deep dark
Speaker 1: days of two thousand eight early two thousand nine. Lehman
Speaker 1: Brothers had just collapsed. Money markets were disintegrating. There was
Speaker 1: a banking crisis, asset prices were falling, and basically it
Speaker 1: looked like the world was kind of falling apart. But
Speaker 1: then came the central banks, and suddenly everything was slightly better,
Speaker 1: and things were pretty good for a while. The economy
Speaker 1: didn't double dip as some people had warned it would,
Speaker 1: though there were occasional bouts of volatility, But then the
Speaker 1: narrative started to change. Around the turn of this year,
Speaker 1: more than seven years after the financial crisis, economic growth
Speaker 1: still hadn't picked up significantly, despite multiple expansion and reprograms,
Speaker 1: multiple steps of stimulus, trillions of dollars worth of asset purchases.
Speaker 1: People started talking about this idea, and drug confronted this
Speaker 1: directly that they run out of ammunition, worrying that they
Speaker 1: wouldn't be able to keep markets happy forever. Let's hear
Speaker 1: what Mario Joggy actually had to say about that ammunition
Speaker 1: question last week. Well, I think the best answer to
Speaker 1: this is being given by our decisions today. It's a
Speaker 1: fairly long list of measures, and each one of them
Speaker 1: is very significant and devised to have the maximum impact
Speaker 1: into boosting the economy and the return to price stability.
Speaker 1: So we have shown that we are not short of
Speaker 1: ammunitions on the table for today's discussion is basically markets
Speaker 1: crisis of faith. Let's call it in central banks and Mohammed,
Speaker 1: you're actually perfectly placed to discuss this topic because you've
Speaker 1: just written a book. In your book is called the
Speaker 1: only game in town, the only game being those central banks.
Speaker 1: How did you come up with that topic? So it
Speaker 1: came from a central banker. I was at a conference
Speaker 1: in November of organized by the Central Bank of France
Speaker 1: the Band of France, and the outgoing governor Chris shan
Speaker 1: Yer opened it and it was attended by lots and
Speaker 1: lots of central bankers around the world, and I was
Speaker 1: sitting there and he basically defined the conference in the
Speaker 1: following term. He said, we have become the only game
Speaker 1: in town, and we don't like it. The title comes
Speaker 1: from him because it really speaks to the fact that
Speaker 1: central banks have been forced They haven't chosen to, They
Speaker 1: have been forced to take on more and more responsibility,
Speaker 1: knowing really well that their instruments are badly suited for
Speaker 1: the responsibilities that taken on. But they have felt that
Speaker 1: I had no choice to do it, and increasingly they
Speaker 1: became the only game in town, and their success has
Speaker 1: become a function of somebody else. And that's a very
Speaker 1: uncomfortable position to be in. And that's why the governor said,
Speaker 1: we don't like it. We'll talk to us about those
Speaker 1: instruments and what effect they actually have on markets. So,
Speaker 1: like you said, the first part of the story is
Speaker 1: a simple one, which is post financial crisis. Had they
Speaker 1: not stepped in, stepped in with whatever it takes, and
Speaker 1: that means using balance sheets, flooring interest rates, creating markets
Speaker 1: where markets where dysfunctional, we would have had a multi
Speaker 1: year depression around the world that would have undermined this
Speaker 1: generation and probably the next generation. Then comes Phase two.
Speaker 1: Phase two was in the United States and in Europe.
Speaker 1: In at the end of when the immediate crisis is resolved,
Speaker 1: the patient, if you like, is out of the I
Speaker 1: c U, but the patient is still not doing really well.
Speaker 1: Central banks looked around and came to the conclusion that
Speaker 1: no other policymaker was able and willing to step in,
Speaker 1: so they, like any doctor would do, Rather than abandoned
Speaker 1: the patient, they decided that they would continue to treat
Speaker 1: the patient, even though the medicine they were using wasn't
Speaker 1: well suited for that, and they sound at times both
Speaker 1: resentful and defensive about that. You know, they're absolutely right.
Speaker 1: They're resentful because they are going from being part of
Speaker 1: the solution to now causing complications and potentially becoming part
Speaker 1: of the problem, and they don't like that. They also
Speaker 1: know that if our politicians in Europe, in Japan, in
Speaker 1: the United States where to get the act together, there
Speaker 1: are measures that have been identified ide that could make
Speaker 1: things a lot better, and that would allows central banks
Speaker 1: to normalize and be and remain part of the solution.
Speaker 1: There's a perception that fiscal policies out to lunch, that
Speaker 1: these guys have no choice. In the immediate, very immediate
Speaker 1: post crisis period, there was a sense that fiscal and
Speaker 1: monetary were swimming together. Then that narrative broke down. What
Speaker 1: do you think happened there? The sense of immediate crisis passed.
Speaker 1: So I remember very clearly when government officials turned up
Speaker 1: in Washington, d c. In the fall of two thousand
Speaker 1: and eight and they realized that what they were facing
Speaker 1: at home was a global crisis, that other countries were
Speaker 1: facing exactly the same thing. And at that point there
Speaker 1: was a common understanding that you need to deploy the
Speaker 1: whole range of policies, fiscal, monetary and structural, and you
Speaker 1: need to do it in coordinate fashion. And we had
Speaker 1: the successful G twenty summit in April two tho and
Speaker 1: nine in London. Then two things went wrong. One, the
Speaker 1: mindset remains cyclical. Somehow people believed that since the crisis
Speaker 1: occurred in advanced countries, advanced countries live in cyclical space,
Speaker 1: so this would be a V shaped recovery. You come
Speaker 1: down very quickly, yes, but you recover very quickly. There
Speaker 1: wasn't enough appreciation that this was something much more fundamental.
Speaker 1: It was structural in nature. It was a new normal
Speaker 1: that there it is new normal, right, and there was
Speaker 1: no understanding at that point that this was something secular
Speaker 1: in nature. The second thing that went wrong is with
Speaker 1: the sense of immediate crisis behind us, politicians started relaxing
Speaker 1: and they didn't realize that anger would start growing in
Speaker 1: society that would make it even more difficult to take
Speaker 1: bold actions later on. So I think, you know, it
Speaker 1: was a question of the crisis didn't last long enough,
Speaker 1: and the mindset was wrong. And it's ironic that the
Speaker 1: fiscal policy bankers and we're talking about governments and legislatures
Speaker 1: that undertook those measures during the crisis, many paid the price,
Speaker 1: and yet the narrative when they were hounded out of
Speaker 1: office was you haven't done enough for me. I'm still
Speaker 1: feeling like it's a recession, even though technically the economies
Speaker 1: were expanding. Again, it's pretty ironic, don't you think. I
Speaker 1: don't know if it's ironic as much as it's a
Speaker 1: reflection that while the economies were expanding, they weren't expanding
Speaker 1: fast enough, and the benefits of that expansion we're going
Speaker 1: to a very small segment of the population, the rich.
Speaker 1: So what you had is insufficient growth, and the benefits
Speaker 1: of that growth were not shared in an inclusive fashion,
Speaker 1: and that's why people started getting angry. And the reason
Speaker 1: why that happened is because we relied on finance to
Speaker 1: get us out of the problem. So private finance got
Speaker 1: us into the crisis, and public finance a central banks
Speaker 1: were relied on to get us out of the crisis,
Speaker 1: and we didn't invest in genuine creators of economic growth.
Speaker 1: Being you're familiar with the arguments of Ben Banankee and
Speaker 1: to an extent, Paul Krugman, who say, look as long
Speaker 1: as we're here, we're going to keep swinging. We're not
Speaker 1: going to be the guys who went down in history
Speaker 1: as allowing another depression to happen. And you have some
Speaker 1: sympathy for that view, Yeah, I think of central banks
Speaker 1: as doctors. No doctor will walk away from a patient
Speaker 1: even if they don't have the right medication. They will remain. So, yes,
Speaker 1: they will continue swinging, to use your phrase, but they
Speaker 1: will become increasingly ineffective. But a fiscal policy is perceived
Speaker 1: to remain out to lunch, then what choice do these
Speaker 1: guys have. So are four things that need to happen, fiscal, monetary,
Speaker 1: structural reforms, and a bit of that forgiveness. If you
Speaker 1: rule out three of them and just leave monetary policy
Speaker 1: on the table, which what we have, what we've done,
Speaker 1: not only do you get inadequate outcomes, but you start
Speaker 1: getting tensions that ultimately undermine the pathy wrong And that's
Speaker 1: where I think we're on now. Because policy monetary policy
Speaker 1: becomes ineffective. Do you think the political system is up
Speaker 1: to instituting those three other things you talked about? From
Speaker 1: an engineering perspective, absolutely, I don't think the engineering of
Speaker 1: this is difficult. From an implementation perspective, we probably will
Speaker 1: need some sort of crisis, hopefully a small crisis, to
Speaker 1: wake up the political class. I mean, if anything, right now,
Speaker 1: it seems like we're veering even more towards isolationism, protectionism,
Speaker 1: and populist outrage at authorities in general. You're absolutely right,
Speaker 1: and certain things happen when you grow slowly and when
Speaker 1: inequality goes up. Most importantly, people get angry. Now what
Speaker 1: do you do when you get angry? You blame your neighbor.
Speaker 1: And if your neighbor happens to be a foreigner, that's
Speaker 1: even better. So it's not surprising to me at all
Speaker 1: that there's a populous movement. It is not surprising me
Speaker 1: at all that that we're hearing both sides of the
Speaker 1: political spectrum the United States talk about protectionism. That is
Speaker 1: what happens when economies grow slowly for a prolonged period
Speaker 1: of time. It's rhetorick right now. I don't think that
Speaker 1: we are going to swing from where we are now
Speaker 1: to protectionism because it's actually very difficult to get lobbies
Speaker 1: for protectionism today because we are consumers and producers at
Speaker 1: the same time. But what we will get is an
Speaker 1: emphasis on fair trade, so you'll hear less the phrase
Speaker 1: free trade, and you'll hear more the phrase fair trade.
Speaker 1: Let's go back to monetary policy for a second, because
Speaker 1: we've been talking about fiscal policy. The assumption here being
Speaker 1: that fiscal policy is possibly the only thing left to
Speaker 1: help boost economic growth at this point is that you're
Speaker 1: thinking it's one of the freak of the four components.
Speaker 1: So monetary policy can play a role if supported by
Speaker 1: fiscal policy that matches the will and the wallet to spend.
Speaker 1: We have separated the will from the wallet to spend,
Speaker 1: so we have a problem of aggregate demand. We also
Speaker 1: need to deal with structure reforms to promote genuine engines
Speaker 1: of growth. That means investing in infrastructure, that means corporate
Speaker 1: tax reform, that means greater emphasis on labor retooling, and
Speaker 1: there's a lot of scope for private public partnership. And
Speaker 1: then we have to do the very difficult thing and
Speaker 1: I hate, I would hate doing it because there's huge
Speaker 1: issues of fairness. But we need to also look at
Speaker 1: excessive indebtedness in the system and deal with it. This
Speaker 1: is particularly acute for Europe in the case of Greece,
Speaker 1: and it will become acute in the United States with
Speaker 1: student loans, so debt forgiveness on the table, selective debt
Speaker 1: forgiveness in the next five years for part of our
Speaker 1: younger people who have taken on way too much student
Speaker 1: debt and whose return on education will never be high enough.
Speaker 1: We've learned a few things from episodes of excessive indebtedness,
Speaker 1: particularly what's called the debt overhang. It's one of the
Speaker 1: contributors to the last decade in Latin American the eighties.
Speaker 1: When you have too much debt, too things happen. First,
Speaker 1: it crushes you directly. Second, it discourages any new capital
Speaker 1: from coming in, so you end up in a vicious
Speaker 1: cycle that's almost impossible to get out. You see it
Speaker 1: in Greece every single day. And now there was a
Speaker 1: there was a risk that we may have this as
Speaker 1: a headwind to growth. There's not an immediate crisis, but
Speaker 1: it will be a headwind to growth. And yet, Muhammad,
Speaker 1: the central Bank is same resigned to playing this role
Speaker 1: that has outlived its usefulness. Mario Dragi said at his
Speaker 1: press conference. Quote the measure driver of the economy and
Speaker 1: the recovery basically remains our monetary policy. How do they
Speaker 1: get out of that? So they need we all need
Speaker 1: the handoff. We need the handoff from prolonged and excessive
Speaker 1: dependence on central bank policies to a more comprehensive policy response.
Speaker 1: Remember when the first central bank went unconventional to pursue
Speaker 1: economic objectives as as opposed to normalize dysfunctional financial markets,
Speaker 1: which is August two and ten in the case of
Speaker 1: the US. Ben Bernacki made it very clear. He said,
Speaker 1: when you go unconventional, it's about quote benefits, costs and risks.
Speaker 1: And the longer you see unconventional, the gay to the
Speaker 1: threat that the benefits come down and the risks and
Speaker 1: the costs go up. I that the collateral damage and
Speaker 1: the unintended consequences exceed the benefits. Central bankers know that,
Speaker 1: they know that, and yet they're unable to hand off
Speaker 1: to the more comprehensive So they are in a really
Speaker 1: difficult situation. And that's why I said at the beginning,
Speaker 1: they no longer control their destiny, and that makes them
Speaker 1: really uncomfortable. Do they worry that the independence of central banks,
Speaker 1: which has really been a hallmark of the past thirty years,
Speaker 1: began in the US, But it's spread to the UK,
Speaker 1: it spread to the Eurosystem members and in the late
Speaker 1: nineties to Japan. Is that at risk? In other words,
Speaker 1: their very identity is that at risk from these popularist
Speaker 1: pressures that you've said a growing Ultimately, will there be
Speaker 1: a legislative response and is that what they deeply fear
Speaker 1: they do? And it is at risk? We already saw
Speaker 1: the Japanese parliament go crazy over the Bank of Japan
Speaker 1: when the Bank of Japan took create negative um. In
Speaker 1: the US, there are calls for greater audit of the
Speaker 1: central bank. We are very close to a politician realizing
Speaker 1: that when they expand their balance sheets as the e
Speaker 1: c P announced would do more of last week, that
Speaker 1: they really are quasi fiscal agencies. And the minute you talk,
Speaker 1: you put fiscal in the phrase. Even if it's quasi fiscal,
Speaker 1: there's a question, why aren't they coming to parliament for approval? So, yes,
Speaker 1: central banks are worried, and they're right to be worried.
Speaker 1: Will they use Will they lose their independence? I don't
Speaker 1: think it will happen very quickly, but they will find
Speaker 1: that they will become more political than they have in
Speaker 1: the past. Do you think one of these days one
Speaker 1: of these bills in Congress will sneak through. It's really
Speaker 1: hard to say then. I mean, so many crazy things
Speaker 1: are happening on the political side, and some of them
Speaker 1: are not very rational, so it's hard to say. It
Speaker 1: really is a risk, and that would be a disaster.
Speaker 1: It's gone from being very much a fringe view in
Speaker 1: Congress to almost a mainstream view. The audit the FED,
Speaker 1: for example, each year gets more and more adherents, but
Speaker 1: it can't quite get through. That's why I wonder whether
Speaker 1: one of these days something is going to get through.
Speaker 1: It's certainly a risk. I want to go back to
Speaker 1: the ammunition question for a bit, because it seems like
Speaker 1: late last year we did suddenly see a chorus of
Speaker 1: voices expressing concern over the idea that central banks had
Speaker 1: fired off all the monetary policy shots they had in
Speaker 1: their collective armory. I guess to stretch the analogy, what
Speaker 1: do you think about that, Mohammed? Is that true? So
Speaker 1: they have instruments. I don't think the issues were they
Speaker 1: have instruments or not. I think it's how well suited
Speaker 1: are the instruments for the objectives are trying to pursue
Speaker 1: and from day one. They weren't perfectly suited, and the
Speaker 1: longer they've relied on imperfect instruments, the greater the collateral damage.
Speaker 1: Go back to the example of the doctor. If she
Speaker 1: or he prescribes you the wrong medication because the right
Speaker 1: medication isn't available, you will worry about the side effects.
Speaker 1: And we're starting to worry about the side effects. It's
Speaker 1: the old notion that at some point the side effects
Speaker 1: totally overwhelmed the good that the medication was doing. So yeah, so,
Speaker 1: so people should be worried. But it's not because of
Speaker 1: the lack of instruments. It's just that the instruments aren't
Speaker 1: well suited for the objectives that are being pursued by
Speaker 1: central banks alone. Mohammed, one last question before we let
Speaker 1: you go to use your doctor analogy again. How should
Speaker 1: we be judging the success of central banks? You know,
Speaker 1: if they're doctors, they've kept markets alive for this long,
Speaker 1: but they haven't really treated the underlying illness. So I
Speaker 1: would give them a plus for effort throughout the whole period.
Speaker 1: A plus effort. You know, they they have really done
Speaker 1: enormous I'll give them a plus. Between two thousand and
Speaker 1: eight and two thousand and ten for the FED for
Speaker 1: helping us to avoid a multiyear depression. I would give
Speaker 1: him a B for buying time for the system between
Speaker 1: two thousand and ten and two thousand and fifteen, in
Speaker 1: the hope, the misplaced hope, as it turned out, in
Speaker 1: the hope that our political class would respond, and I
Speaker 1: would give them an incomplete as to whether they become
Speaker 1: part of the problem having been part of the solution.
Speaker 1: All right, Muhammad al Arian, thank you so much for
Speaker 1: your time. Thank you, all right, Dan, Have we come
Speaker 1: away from that any clearer on whether or not central
Speaker 1: banks are running out of bullets? I think we've come
Speaker 1: out of this with an understanding of the framework that
Speaker 1: that debate is happening in, and few if any, people
Speaker 1: are as articulate on the subject as our guest. I thought.
Speaker 1: The idea of fiscal policy is really interesting, especially since
Speaker 1: we seem to be hearing more and more economists and
Speaker 1: analysts talk about the need for these sort of measures.
Speaker 1: The thing that concerns me, which Mohammed touched on, was
Speaker 1: this idea that suddenly we're going to have an epiphany
Speaker 1: and be able to come out of all the politics
Speaker 1: surrounding those issues and actually tackle things like debt overhangs.
Speaker 1: How plausible do you think that is? I don't know.
Speaker 1: There's almost an element of tragedy about this. The Central
Speaker 1: Banks were widely perceived to have, if not saved the world,
Speaker 1: then staved off a second great depression. They're not getting
Speaker 1: much thanks for their action now, and yet, as Mohammed
Speaker 1: pointed out, this little sign that fiscal policy makes are
Speaker 1: willing to help them out of this trap into which
Speaker 1: they've got themselves. It is tragic. Don't you think it's
Speaker 1: definitely tragic? It's also definitely interesting times. And I mean
Speaker 1: that in the classic Chinese curse use of the word right. Okay.
Speaker 1: Thanks again to Dan for being my co host for
Speaker 1: this episode of Odd Lots, and thanks to Mohammed el Arian.
Speaker 1: His book is the only game in town Central Banks,
Speaker 1: Instability and avoiding the next collapse. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway. You can
Speaker 1: also follow Mohammed el Ariyan he is at el Arian M.
Speaker 1: I'm Daniel Moss. You can get me at Daniel Moss
Speaker 1: d C. Thanks for listening.