Focus on Finance

“The world has largely exhausted the scope for central bank improvisation as a growth strategy,” says Larry Summers, Harvard economist and advisor to Presidents. 

The new normal is low growth, rising inequality, political dysfunction and sometimes social tension.  Central banks have intervened.  Technical innovation has been transformative. And yet we are at a fork in the road.  Great New York Yankees baseball catcher Yogi Berra was fond of saying, “When you come to a fork in the road, take it.” 

Unfortunately we can’t have both forks.  Either we will get higher inclusive growth and genuine financial stability.  r we will get mired in lower growth with periodic recessions and the return of financial instability. 

We need to make better choices as households, companies, and governments.

WHen other policy makers were paralyzed by the world economic crisis in 2008-9, central banks stepped up.  The created a largely artificial growth path but the underlying engine of economic prosperity was not re-vamped. 

Central banks’ ability to pull new rabbits out of a hat is shrinking. 

The 17th century saw the creation of the first central banks in Sweden and then England.

Today the US Federal Reserve is the most powerful central bank in the world, but it was only created following a financial crisis in 1913.   The Fed’s mission is to “provide the nation with a safe, flexible, stable monetary ans financial system.”

The European Central Bank, representing 19 nations, is the second most powerful. It began to operate in 1999. 

We will present a series of articles on central banks.  They are based on Mohammed El Erian’s recent book, “The Only Game in Town: Central Banks, Instability and the Next Collapse.”