The central bankers who saved the world economy are now being told they risk hurting it.
Even as the International Monetary Fund cuts its global growth outlook, a flood of stimulus is running into criticism at the World Economic Forum’s annual meeting in Davos. Among the concerns: so-called quantitative easing is fanning complacency among governments and households, fueling the risk of a race to devalue currencies and leading to asset bubbles.
“Central banks can buy time, but they cannot fix issues long-term,” former Bundesbank President Axel Weber, now chairman of UBS AG, said in the Swiss ski resort yesterday. “There’s a perception that they are the only game in town.”
The warnings, louder this year than last, come as U.S. stocks hit the highest since late 2007, London house prices jump and junk bond yields fell below 6 percent for the first time. The challenge for policy makers in Davos and beyond is to decide whether it’s time to act on those moves now or to keep pushing measures to shore up a still-ailing global economy.
“When you buy time it’s what you do with it that matters,” said Davide Serra, a managing partner at London-based Algebris Investments LLP, who says central banks need to work harder to push governments into cutting bloated budgets.
Central bankers including European Central Bank President Mario Draghi and Bank of Canada Governor Mark Carney will have time to outline their current thinking before the world’s financial elite when they speak at Davos in coming days. Almost five years since the collapse of Lehman Brothers Holdings Inc., interest rates in major economies are still near zero and the balance sheet of the Fed alone is nearing $3 trillion.
Draghi addresses the forum tomorrow and Carney speaks at a panel on the global economy on Jan. 26, the same day as Japanese Economy Minister Akira Amari is in town.
Quantitative easing “is one of the greatest monetary experiments of all time, they’ll be writing books about it for a thousand years,” said JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, who is also in Davos.
Warnings about a new money glut are not going unheeded. U.S. Federal Reserve Chairman Ben S. Bernanke said Jan. 14 that officials must “pay very close attention to the costs and the risks” of emergency stimulus. Bank of England Governor Mervyn King said last week “the search for yield appears to be beginning again.”
For now, most central bankers are still siding with easy policy as the Fed targets lower unemployment with a third round of asset purchases and the ECB offers to snap up the bonds of cash-strapped countries. This week alone, the Bank of Japan embraced Fed-style purchases and a higher inflation target, while the Bank of Canada called higher interest rates “less imminent than previously anticipated.”
The all-in approach was defended by Adam Posen, who stepped down in August as a Bank of England policy maker and now runs the Washington-based Peterson Institute for International Economics. He led the charge for stimulus in the U.K. and contended in Davos that central banks have the wherewithal to both rally their economies and avoid market fallout.
“There are short-term benefits of quantitative easing and the long-term risks are minimal,” said Posen. “What is called unconventional monetary policy is the sort of things central banks have done all the time.”
Barry Eichengreen, a professor of economics at the University of California, Berkeley, said “the best of all worlds would be if all central banks agreed to give more support for growth.”
The concern of Weber, who resigned as head of Germany’s central bank in 2011, is that so long as central banks maintain easy money, governments and households won’t have an incentive to cut their own debts. The result is economies will be artificially boosted, delaying the inevitable reckoning.
“We are trying to keep a speed limit for our economies which is unsustainable,” said Weber, who quit the Bundesbank partly on concern about the ECB’s decision to buy bonds of Europe’s most indebted countries. “We’re headed into a dangerous environment.”
The Standard & Poor’s 500 Index yesterday rose to the highest since Dec. 2007, and has jumped almost 5 percent this year. In London, a Rightmove Plc measure of asking prices rose 3.6 percent to an average 480,890 pounds ($762,000).
Paul Singer, founder of hedge fund Elliott Management Corp., said that policy makers have been “lulled into security,” believing that quantitative easing, is “costless” when it is actually distorting the price of long-term debt and maybe equities.
While praising central banks for having “saved the system” in 2008 when a financial crisis tipped the world into recession, JPMorgan’s Dimon said the onus should now shift to better fiscal and structural policies from governments.
“Most important now is good sustainable growth to make the central bank job easier,” said Dimon. “It’s incumbent on governments to do good fiscal policy.”
Serra said more central banks should follow Draghi’s lead after the ECB chief last year stanched the euro crisis by announcing an emergency bond-buying program tied to austerity commitments by governments.
Another concern taking center-stage in Davos is whether countries will start tussling for cheaper exchange rates in an attempt to boost their economies through exports.
The so-called currency war debate has reignited as Japan’s new prime minister, Shinzo Abe, pushes for laxer monetary policy. The yen has dropped 7 percent against the dollar since the start of December. Bundesbank President Jens Weidmann this week warned against “increasing politicization of the exchange rate” and undermining the Bank of Japan’s independence.
Nouriel Roubini, chairman of Roubini Global Economics LLC in New York, said the risk is that if every central bank seeks to weaken its currency, the result would be a “zero sum game” in which no nation benefits and commodity prices jump.
The central bankers found support from James Gorman, chief executive officer at Morgan Stanley, who told Bloomberg Television’s Erik Schatzker in Davos that markets weren’t overpriced and that most economies remained in need of help. The IMF yesterday lowered its forecast for world economic expansion this year to 3.5 percent from October’s 3.6 percent.
“We’re still in a recovery zone,” Gorman said. “There’s still a lot of muted areas around world, there’s no one running a victory lap just yet.”