the award to the former Fed Bernanke and the paradox of the recession- Corriere.it

L’former Federal Reserve Chairman Ben Bernanke was awarded the Nobel Prize last week (together with Douglas Diamond and Philip Dybvig). Recognition for the economist, for the academic who has studied financial crises. Not for the central banker: there is no Nobel Prize for central bankers. And it’s probably good that it is: these days, it would be rather difficult to assign it to anyone; one thing to elaborate theories, another to verify them to the test of reality. And, when you look at the reality of these days, after two decades in which central banks have dominated the markets, we see that the global financial situation is deteriorating so rapidly that it raises serious alarms e questions about the twenty-year choices.

The signals

Central banks are hardening in a storm – says Robin Brooks, former Goldman Sachs, now chief economist of the Institute of International Finance (Iif), the association that brings together 450 financial companies and central banks from 70 countries -. Oil prices are flat after the OPEC + cut because demand is weak; there is an acute deterioration in liquidity in the global bond market; signs of a shortage of dollars in cross-currency basis swaps (contracts on currencies, ed); the case grows in favor of a moderate pivot (i.e. lower rate hikes, ed), a case that is now becoming urgent. Basically, Brooks says that the major central banks – headed by the Fed today led by Jerome Powell – are draining excessive liquidity from the markets and there are signs of a storm coming.

The effects of the hold

In other words, even in finance, not only in geopolitics, we have entered a new world: after decades of low rates, then tending to zero, and after extraordinary injections of money via Quantitative Easing, now the monetary squeeze creates instability, in some cases panic. After the decades of easy money produced by central banks, it is now difficult to understand where risks have accumulated. The case of the United Kingdom is the first explicit signal of this situation.

The Truss case

The botched and disastrous mini-budget proposed by Prime Minister Liz Truss and her Chancellor of the Exchequer Kwasi Kwarteng triggered a reaction in the markets and weakened the pound. The government’s misstep was the trigger for the crisis: at the root is the situation in which British pension funds are. In recent years, faced with ludicrous interest rates that have reduced their returns on investments, funds have used, among other things, hedging techniques and derivatives to address the situation and to respond to robust regulations set by regulators. financial. Most of the funds have thus remained complacent, believing until recently, as well as central banks and many economists on the other hand, that inflation was temporary. and that rates would remain low. But when these have risen and when it was thought that the Bank of England would have raised them even more due to the expansionary maneuver of the government, the funds had to sell large quantities of government bonds. Hence the crisis and the forced intervention of the British central bank on the markets.

Bernanke’s ideas

Nobel laureate Bernanke became Fed president in 2006 and remained so until 2014. He had previously been one of the governors of the American central bank, during the presidency of Alan Greenspan, and from his position – not yet Nobel but authoritative academic – he had long argued the need to keep rates low despite a strong economy. He believed that rules were needed to maintain financial stability and was less concerned about possible bubbles encouraged by a very generous monetary policy. When, under his gaze, the 2008 crisis broke out, in fact Bernanke continued a monetary policy similar to the previous one: ever lower rates and then Quantitative Easing, injecting liquidity into the market. At that point, it was essential to intervene in this way: the meltdown of the global financial system was risked.

Washington model

The fact that this approach – already somewhat Soviet since the early 2000s, that is, moved by the idea of ​​controlling and guiding finance – has been going on for years: creation of money, continuous response to market movements, manipulation of financial prices that at that point they were heavily dependent on the actions of the Fed, which in turn did not want to avoid tensions on the markets themselves; in a vicious circle. This pattern drawn in Washington later became the reference for many other central bankseach with its specific problems.

The role of central banks

For nearly 15 years, one of the recurring phrases in the world of finance has been Central banks are the only game in town, central banks are the only protagonists in the city. In the sense that they have driven the economy more than businesses and governments themselves. Central bankers’ reputations soared. Now that the season has changed, now that the protagonists in the city are Vladimir Putin and Xi Jinping, and now that inflation (undervalued until a few months ago) is biting, the status of central bankers is also taking a hit. They had to reverse their views on the nature of the ongoing inflation, which in the United States it is shifting from energy to general prices; and they are criticized for delaying in exiting monetary super-stimulus policies, with consequences according to some potentially leading to insolvencies.

The derivatives

Contracts on the currencies and interest rates of bonds, made with financial derivative instruments, are linked to underlying assets that have a global value of more than 550 trillion dollars. And they influence each other. The risks of destabilization of some intermediaries caused by an undervaluation or sudden events cannot be overlooked, given the new situation in which the markets find themselves. This makes the mission of central banks, if possible, even more complicated than in the past, which, recently, have not given the best proof of themselves. Despite the Nobel to Bernanke.

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