A few weeks after the Coruna virus epidemic, the world’s most powerful central banks have once again swept to the heart of crisis management, how they emerge from this emergency – and how they will affect their political independence, tasks and reliability – are not related to what they do as far as what is happening around them. .
After a golden age in which central banks devoted themselves to controlling inflation and at times taming volatile trade cycles, their reputation was tarnished by the 2008 global financial crisis and the recession that followed.
But the violent policy of “doing what it takes” finally helped them win this war, but the prolonged and excessive dependence on them – the result of the failure of most developed countries to move towards a more comprehensive policy – made them lose their peace.
In the current crisis, which will shape the life of the generation, the central banks went to apply all possible tools, and employed emergency interventions in record time that exceeded even the steps taken during the global financial crisis and its aftermath.
What they have already done is surprising, including lowering interest rates, embarking on large-scale securities purchase programs, reopening emergency financing windows, and creating new windows.
The scope of this response is also unprecedented.
The “Federal Reserve” currently expanded its budgets to $ 6 trillion, which is an increase of $ 2 trillion in less than a month. It also took exceptional steps to ease the regulations, with the aim of helping banks play an important role in relief efforts.
He also continues to work closely with the Treasury, venturing in areas previously considered prohibited, either because of the risks involved or the possibility of its dangerous deviation.
As the old example says, “good is doing evil,” so much as violent interventions are welcome in containing severe economic damage, no one denies the costs and risks that come with it.
These risks are not only economic and financial but also institutional and political, which include the following:
Firstly, the Federal Reserve exposes itself to risks that go out of its control by exposing its budget to various sectors of the economy, either directly or in partnership with the Treasury, and includes extreme credit risks that come from default and bankruptcy.
Secondly, by “generating massive liquidity” to support markets, central banks can unwittingly contribute again to strengthening investor behaviors that have always caused asset valuations to separate from underlying economic fundamentals.
Indeed, the stock market rose in response to the Fed’s excessive activity, and the result will be continued reduction in liquidity risk and deepening unhealthy dependence between central banks and markets, along with increased risks of financial stability in the future.
Third .. The central banks drifting to overthrow the crisis management, and making many decisions in the midst of “the fog of war”, means that the chances of them making mistakes are very high, and the chances of them changing their positions.
Fourth .. By attracting more attention to the trillions of dollars that are being used to avoid market collapse, the “Fed” has opened the door to itself again to accusations that it tends to the side of the financial sector, and at the same time, a destructive and unfair view is spreading on social media, which is that The central bank cares more about the richest 1% of the welfare of the people as a whole.
The risks will multiply the longer the time before the economy is reopened, and the longer the closure continues, the greater the threat of liquidity problems turning into bankruptcy, and the more questions about the “Fed’s” ruling on matters and its efficiency, which will lead to renewed risks in the market at a time when the “Fed” places huge resources To support the economy.
Unfortunately, these risks will not end once the period of exceptional crisis management has passed, but will extend to the next two phases, which are reopening the economy and the political scene after the crisis.
With time it becomes clear that reopening the economy will not be immediate or general, as everyone had hoped, but rather that the chances of reopening the economy, whether at the local level or in the global economies, will raise a new set of challenges for central banks, governments, companies and families.
Next, we will need to navigate a scene that includes more than just dismantling the intense overlap between public and private sector activities, and we may face an environment of more slow supply and demand responses.
With the expected shift in corporate focus from efficiency to flexibility, we should expect that many global companies will redistribute their supply chains even if this means sacrificing costs, and this process will accelerate the trends already prevailing to reduce globalization.
All of this will, at least in the short term, lead to a decline in productivity with a high risk of the emergence of “zombie” companies – that is, unable to pay their obligations or whose revenues are less than their expenses – as a result of the enormous financial support provided by governments and central banks, and at the same time continue High indebtedness companies, as well as governments.
Both trends may put more pressure on the “Fed” to avoid raising interest rates in the coming years.
On the demand side, households may avoid risks, and may not respond to the stimulus policies that will follow the current relief phase, and the longer the crisis period and the harder it becomes to restart the economy, the more likely it is to repeat a frugal generation like the Great Depression generation.
It is important to mention that the optimal response of central banks to all these uncertainties is not stagnation, but rather to continue to work hard to analyze scenarios and communicate internally and externally and to continue contingency planning and feedback and adjust the path whenever necessary, and to avoid the mistakes of the global financial crisis, these efforts should support an approach It includes a “whole government” that combines catalysts and a set of structural reforms aimed at combating downward pressures on productivity and growth potential.
Otherwise, central banks may again succeed in winning the war against recession, but they will be part of a system that fails to achieve sustainable inclusive growth peace.