There is something profoundly pathetic about the fact that the dominant concern
of the entire financial world for the last two weeks has been what the chairman
of the Federal Reserve Board, Ben Bernanke, will say at the annual late-summer
gathering of central bankers and senior economic figures, held at Jackson Hole,
Wyoming. The words that will issue from Bernanke’s mouth will, supposedly, be
critical for the financial markets and for the American and global
This is what it has come to, five years into the global
economic crisis and four years after the “Lehman moment” that sent the crisis
spinning out of control and placed the entire world on the very edge of a major
depression. It is axiomatic in mainstream financial circles that: a) the actions
of Bernanke and his fellow central bankers at that time prevented the descent
into depression; b) his subsequent policies, meaning various iterations of
“unorthodox monetary policy,” aka “quantitative easing” (QE), have enabled the
American economy to mount a slow recovery from “the Great Recession” that
occurred in 2008-09; c) ergo, if Bernanke will announce another round of QE, or
some other form of what is now being called “unorthodox unorthodox policy” –
since the old “unorthodox” is the new “orthodox” – then the outlook for the
American and world economies will instantly brighten.
Thus, if Bernanke
announces, or even discusses, or merely hints in his speech on Friday that the
Fed will pump several hundred billion dollars into the markets, every market in
the world will rally. If, on the other hand, he fails to announce, discuss or
even hint that action is coming, then he will be deemed as having “disappointed”
the markets, and they will promptly plunge.
Furthermore, it had been
hoped or believed that Bernanke’s opposite number at the European Central Bank,
Mario Draghi, would also attend the Jackson Hole conference and that he, too,
would announce new steps, measures, actions – or at least substantive plans –
whereby the ECB would buy large quantities of sovereign bonds of crisis-ridden
European countries such as Spain and Italy. However, earlier this week Draghi
announced that he was canceling his participation in the J-Hole show. That meant
he had nothing to say there – and the cause of his silence is no secret, since
the argument between him and the German central bank, the Bundesbank, and its
representative on the Governing Council of the ECB, is being played out in full
public view in the newspapers, news services and financial TV daily and almost
No such open opposition faces Bernanke. Nevertheless, after
literally millions of words of analysis and commentary had been spoken and
written during August as to whether and what he would say on Friday, a consensus
emerged this week, one that embraced even the perma-optimists among the
financial houses and their strategists: that he would not announce, discuss or
hint at anything new or substantive.
Against this background, the hopeful
expectation that had permeated the markets turned to ex ante disappointment, so
that on Thursday the mood turned negative and the direction of prices of shares
and bonds across the world followed suit.
However, what is both pathetic
and tragic is the very fact that what Bernanke or Draghi say or do is seen as
the be all and end all of financial and economic developments.
in this approach is not merely the belief, noted above, that the central bankers
saved the world last time and their subsequent actions have kept things steady,
but that they can and will do so again – and again, as many times as necessary.
This is such obvious drivel that one wonders how anyone can believe it – after
all, if a policy of zero interest rates and central banks buying government debt
is so desirable, why did nobody do it before 2008? And if its benefits are so
clear-cut, then why is there any hesitation or debate? Bring it on – the sooner
the better, and the more the better.
Yet the Germans will not let Draghi
run amok, and something is holding Bernanke back as well. This is actually not
very mysterious, because any objective examination of the impact of the policies
followed over the past four years reveals that each round of QE has had
successively less impact, and that impact has lasted a shorter period each time.
That’s what economists call “diminishing returns.” In addition to declining
benefit (some leading economists believe there was none and that it was fiscal
policy, especially the Chinese stimulus program, that saved the day in 2008),
the pursuit of unorthodox monetary policy has costs, and these actually rise
cumulatively. The distortions introduced into the economies of countries
subjected to QE-type policies make it an unsustainable approach in the long
But the essence of policy these past few years has been to survive
in the short run and push off the inevitable day of reckoning. In that context,
QE makes a warped kind of sense – and that’s why the markets want it, if not
now, then soon. The possibility that it will not come, or that if it comes it
won’t work, is unpalatable – because the alternative to the make-believe
“recovery” it sustains is unthinkable.