This Crisis Shouldn’t End Like the Last One

As the coronavirus pandemic continues, Bloomberg Opinion will be running features by our columnists that consider the long-term consequences of the crisis. This column is part of a package on monetary policy. For more, see Clive Crook on the end of central bank independence, Dan Moss on Asia’s growing influence and Ferdinando Giugliano on Europe’s last chance at reform.

Just a few weeks into the coronavirus pandemic, the world’s most powerful central banks have found themselves shoved violently back into crisis-management mode. How they emerge from this latest emergency — and how it affects their political autonomy, mandates and credibility — is less a function of what they do and more of what happens around them.

After a golden age in which central banks were feted for vanquishing inflation, and sometimes even for taming the vagaries of the business cycle, they found their reputations tarnished by the financial crisis of 2008 and the recession that followed. An aggressive “whatever it takes” policy helped them to eventually win that war. But the prolonged and excessive reliance on them that followed — a result of the failure of most advanced countries to pivot to a more comprehensive policy response — failed to secure the peace.

In this latest crisis, which is likely to be a generation-defining one, central banks have now gone “all in,” deploying emergency interventions in record time that have already exceeded the steps they took during the financial crisis and its aftermath. What they’ve done is truly stunning. It has included flooring interest rates, embarking on massive securities-buying programs, reopening emergency financing windows and creating new ones.

The magnitude of this response is likewise unprecedented. The Federal Reserve has now expanded its balance sheet beyond $6 trillion, an increase of almost $2 trillion in less than a month. It has taken extraordinary steps to lift regulations to help banks play their part in the relief effort. It’s also still working closely with the U.S. Treasury — and, in the process, venturing into areas that were once deemed verboten, both for the risks involved and the potential for serious mission drift.

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As the old saying goes, no good deed goes unpunished. And as welcome as these aggressive new interventions have been in containing already severe economic damage, there’s no denying the costs and risks that come with them. These are not just economic and financial risks, but institutional and political as well.