When Did Governments Get Out of Economy Business?
As Haruhiko Kuroda wowed markets in his first decision as Bank of Japan governor, it was hard not to think back to Alan Greenspan’s days as Federal Reserve head.
In 1987, U.S. President Ronald Reagan created a bit of a monetary monster when he tapped Greenspan to run the Federal Reserve. Whereas his predecessor Paul Volcker had been so hawkish and polarizing that he received death threats from business owners, Greenspan offered a far more populist and dovish take on interest rates.
Markets roared, lawmakers swooned, Greenspan started being featured in People magazine and all accountability went out the window. When a Fed critic stepped up and suggested Greenspan wasn't a god, he or she was dismissed as a quack. The Fed could do no wrong and was trusted to fine-tune the economy. And it was great, while it lasted. When the bubble burst, eventually taking Lehman Brothers down with it, the world realized the U.S.'s monetary emperor had been wearing few clothes all along.
This is important because Greenspan was arguably the prototype for the modern day central bank-government relationship. Come the 1990s, governments abdicated their responsibilities to unelected, independent and often ideological economists to reign over their populations' living standards. The Asia-Pacific region sure got the memo. Governments in Bangkok, Canberra, Jakarta, Kuala Lumpur, Seoul, Tokyo and elsewhere were keen to let central bankers do jobs they were popularly elected to do.
Japan is a prime example. It’s great that Kuroda began his campaign to end 15 years of deflation by doubling monthly bond purchases in a bid to reach 2 percent inflation. But it takes the onus off the government to do its part.
The dark side of this arrangement is that the world is mired in a gigantic liquidity trap. Zero rates around the globe aren't revitalizing growth because few households and companies have the confidence to borrow and banks are reluctant to lend. That leaves fiscal policy as the only real policy lever at the moment. It's something governments have been slow to understand.
"Monetary policy can help by cushioning the private-sector deleveraging process and by making it cheaper for the government to borrow," Paul Sheard, chief global economist at Standard & Poor’s in New York. "But it is no longer the only or even the main policy game in town."
(William Pesek is a Bloomberg View columnist. Follow him on Twitter.)