As the global economy heads for recession and people fear job losses, all eyes are on a few central bankers.
In the history of global economic crises, the job of building confidence in currencies, financial institutions and markets has almost always fallen upon the shoulders of central bankers. At times they have made wrong decisions, which have dried up credit, shut factories and left millions of people jobless.
The years that led to the Great Depression of 1929, saw four men play an outsized role in the events that followed: Montagu Norman at the Bank of England, Benjamin Strong at the US Federal Reserve, Hjalmar Schacht in Germany and France’s Emile Moreau were powerbrokers in the world of finance after the First World War.
Germany was obliged to pay war reparations and similarly, the UK and France also owed money to creditors after the devastating war.
“The quartet of central bankers did in fact succeed in keeping the world economy going but they were only able to do so by holding interest rates down and by keeping Germany afloat on borrowed money,” writes Liaquat Ahamed, in his book Lords of Finance.
“It was a system that was bound to come to a crashing end.”
That was a different time and the reasons that led to the crash in stock and bond prices in the 1930s were distinct from what we see today.
But once again central bankers have come to play an important role in ensuring that money continues to exchange hands, minimising panic.
Not in the good books
Jerome Powell, the head of the US Federal Reserve, has been at the receiving end of US President Donald Trump’s criticism for months. Just days ago, on March 14, Trump threatened to remove him if he didn’t move more aggressively on cutting the interest rate to counter the impact of the coronavirus pandemic.
But Trump has been trying to influence the fiercely independent Fed to cut rates even before the first Covid-19 cases were reported in China late last year. The US president has his own reasons: he wants to boost the US economy in the election year.
In the present crisis, the Fed has taken half a dozen measures in the last few days in a bid to re-energise the financial markets. It has received an additional boost in the shape of a $454 billion supply of funds from the US Congress. Altogether, the US plans to pump $2 trillion into the economy, which has already seen a massive surge in jobless claims.
Powell’s bipartisan approach seems to have paid off in bringing about an urgent response. In the last two years he has met both the Republican and Democrat lawmakers and gained the confidence of Congress.
As a result, they had given the Fed powers to lend to businesses and municipalities. There’s already talk about it taking an unprecedented step into the equity market to buy stocks and it is already buying investment grade corporate bonds.
Powell has faced criticism from other places. In its March 20 editorial, the Wall Street Journal wrote that he, along with Treasury Secretary Steven Mnuchin, have offered “no diagnosis for the economic problem and their prescriptions aren’t clear”.
Central bankers don't generally like the media spotlight - especially in times of crisis. Montagu Norman travelled under false identity and skipped trains to avoid reporters.
So market watchers must have been pleased to see Powell on NBC’s Today Show when he said reopening of the economy will depend on how quickly the virus can be contained.
What a central banker says matters a lot. Christine Lagarde learned that the hard way.
A slip of tongue
In her March 12 remarks during a press conference where she announced monetary measures to counter the pandemic, Lagarde, the president of the European Central Bank (ECB), was asked if the spreads between the yield on different government bonds should be narrowed.
“...we are not here to close the spreads. This is not the function or the mission of the ECB,” she said at the end of a long-winded reply.
The spread is the difference between the cost of borrowing of European member states. For instance the spread between the German and Italian bond yields is seen by investors as a fear gauge in times of financial trouble.
Her remarks led to an immediate rise in Italian bond yields. It also raised concern about the ECB commitment to struggling economies in the Eurozone.
Italians were obviously not happy and Lagarde had to clarify her position.
But it goes to her credit that she has kept up the pressure on European governments to loosen their fiscal policy and increase spending.
As a result, the European Union has introduced a set of incentives including tax relief, loan guarantees and wage support. For its part, Germany has introduced a $550 billion corporate loan package.
Germany has been against such a stimulus package as it has in the past been left to support the members who have borrowed too much to meet their spending needs
Lagarde, who took over as ECB chair late last year after stepping down as the head of the IMF, was already facing pressure from Germany and Netherlands, which were against the loose monetary policy.
Andrew Bailey took over as the Bank of England governor on March 16 as European governments struggled to contain the pandemic.
Within days, the interest rate was cut to 0.1 percent, lowest level in the 325-year history of the bank. That was the second time in 10 days that England’s central bank had reduced the key rate.
England has taken multiple steps to ease the expected blow by announcing a stimulus package of $37 billion, which includes support for firms and more sick entitlements for its workers.
In the coming months, Bailey, who spent years at the bank and rose to become the head of Financial Conduct Authority, a consumer finance watchdog, has another problem to deal with: Brexit.