In the global economic crisis, central bankers are often portrayed as superheroes. Mario Draghi: the only man who can save the euro zone. Ben Bernanke: “please do more” for the U.S. economy. The Bank for International Settlements is unhappy with the image of omnipotence: its latest annual report laments that central bank money-printing and support for the financial sector are reaching their limits.
There’s no question that central banks have taken extraordinary measures. They have made negative real interest rates seem normal in the world’s advanced economies. They have bought vast quantities of government debt or offered vast sums of cheap, long-term loans to banks. Their balance sheets have swelled: at the end of 2011, the combined assets of the world’s central banks stood at $18 trillion – double their pre-crisis level, and equivalent to 30 percent of global GDP.
This monetary largesse has many bad side effects. It reduces the pressure on governments to reform and for banks to recognise bad loans. It distorts financial markets and encourages new recklessness. It pushes up asset prices in emerging markets and other perceived safe havens. And the longer it goes on, the harder it is to unwind.
The BIS is right to worry. Central banks cannot do everything. It is also right that sovereign debt is high: most advanced economies would need to run an annual budget surplus of more than 2 percent of GDP for a decade to get their debt-to-GDP levels back to pre-crisis levels.
And yet, there is something unreal about the BIS analysis. If the world’s largest countries simultaneously ran surpluses, or even cut deficits sharply, the almost certain result would be a global slump. Also, the worries about excessive debt do not square easily with historically low government bond yields.
Unless the economy recovers quickly, the pressure on central bankers to “do more” will only increase. The BIS worries that this “puts at risk central banks’ price stability objective, their credibility and, ultimately, their independence.” True enough, but as long as the likely alternative to heroic measures is a global slump, there will be no realistic alternative. In a new Great Depression, these principles will be even harder to defend than they are today.