Chances are that you didn’t read much, or even anything, about the Jackson Hole event this year. Maybe you were focused on Syria and other regional trouble spots, or, more likely, you were simply on vacation or tuned out in late August. But the fact is, the media hoopla that has become expected and normal for the annual late-summer get-together of most of the world’s leading central bankers and financial savants at “the Hole,” a remote resort in Wyoming, simply didn’t take place. The event, on the other hand, did take place – but most people didn’t hear about it.
The official reason for the lack of reporting and media buzz is that the world’s number one central banker, Federal Reserve Chairman Ben Bernanke, announced months in advance that he would not be attending this year. As may be imagined, this decision triggered an inordinate amount of speculation as to what lay behind it. But the bottom line is that, even now, no one knows. The practical result was that although the show went on without him, as theatrical tradition demands, it was very much a “Hamlet without the prince” affair.
Thus, instead of Bernanke bestriding the world stage like a colossus, to mix the Shakespearean metaphors, this year there was a chance for the “petty men” to do more than merely “peep about to find... dishonorable graves.” The opportunity was seized, and a number of papers were presented that, at the least, questioned the efficacy of the super-expansionary monetary policy followed by Bernanke. Since its adoption during the crisis of 2008, it has moved from being “unorthodox” to being the norm, practiced all round the world.
Of course, the theme that QE may be ineffective and even, whether in principle or in practice, undesirable was not the dominant one in the conference. Had it been so, that would have been truly amazing. But that this theme was heard at all is noteworthy, and that it was heard frequently is remarkable. Yet the theme coming from Jackson Hole chimes with a wider phenomenon, in which growing doubts and reservations about this policy are being voiced even within the existing Fed board of governors – and to a far greater extent among the professional economic and financial community in the US and around the world.
Indeed, we have reached a point at which even leading media instruments, both general and specialist, are openly posing the question of whether the era of central- bank domination of economic policy is past its apogee, or – gasp! – coming to an end. One aspect of this creeping heresy is the changing attitude toward central bankers, especially among the general public.
Thus, you will no longer see Bernanke or his peers hailed as the men who saved the world from a financial meltdown. But you are increasingly like to see them as the butt of surprisingly vicious criticism, including the possibility that they are agents of some nefarious clique of bankers and financial plutocrats. This stems from the growing realization that, after five years of “unorthodox” monetary policy, the clearest – some would say the only – beneficiaries are the world’s big banks and the other financial institutions that know how to make big bucks from the flood of money Bernanke and co.
have unleashed. Meanwhile, savers have been hammered by the lack of investment income, while the bulk of the population finds it ever harder to get and keep jobs, especially those that pay well.
For Bernanke personally, the show really will soon be over, because his (second) term as chairman expires in January, and President Obama has made it very clear that he will not reappoint him. It is widely assumed that Bernanke still will soon initiate a gradual withdrawal from the bond-buying program he has expanded to the level of $85 billion a month. His successor will probably continue that process and may even speed it up. But irrespective of who starts it and when, the consensus among mainstream analysts is that this change is coming.
That explains why the bond market has been weak for many months now, with prices falling and yields rising. This trend actually began in mid-2012, but it has intensified in recent months and is surely the single- most important economic development of the past year. Even if yields do not rise further and merely remain at their present levels, fundamental changes to the economic environment will result: The recovery in the real-estate market has been stopped dead in its tracks, and the negative impact on other interest-sensitive sectors, such as autos, will accumulate with time.
To the quiet strangulation of economic activity stemming from higher interest rates has been added, more recently, the harmful effect of higher oil prices. These act as a tax on both households and firms. But in most developed economies, the proceeds from this tax go overseas, rather than to the domestic government.
There are, therefore, good and strong reasons to be concerned as to the well-being of the global economy.
Against this background, the heretical mutterings of academics against the pantheon of central bankers and their (failed) doctrines is entirely understandable and yet deeply disturbing at one and the same time. As in 2005-06, the realization that the emperor has no clothes is percolating in from the economic periphery to the financial heartland. The results are unlikely to be less dramatic this time.