Central Bankers Admit that Central Banks Have Failed to Fix the Economy

George Washington's picture

Between 2008 and 2015, central banks pretended that they had fixed the economy.

In 2016, they’re starting to admit that they haven’t fixed much of anything.

The current head of the Bank of England (Mark Carney) said last week:

The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibriumFor the past seven years, growth has serially disappointed—sometimes spectacularly, as in the depths of the global financial and euro crises; more often than not grindingly as past debts weigh on activity ….

 

This underperformance is principally the product of weaker potential supply growth in virtually all G20 economies.  It is a reminder that demand stimulus on its own can do little to counteract longer-term forces of demographic change [background] and productivity growth.

 

***

 

In most advanced economies, difficult structural reforms have been deferred  [true, indeed]. In parallel, in a number of emerging market economies, the post-crisis period was marked by credit booms reinforced by foreign capital inflows [including from central banks themselves], which are now brutally reversing….

 

Since 2007, global nominal GDP growth (in dollars) has been cut in half from over 8% to 4% last year, thereby compounding the challenges of private and public deleveraging ….

 

Renewed appreciation of the weak global outlook appears to have been the underlying cause of recent market turbulence.  The latest freefall in commodity prices – though largely the product of actual and potential supply increases – has reinforced concerns about the sluggishness of global demand.
 

***

 

Necessary changes in the stance of monetary policy removed the complacent assumption that “all bad news is good news” (because it brought renewed stimulus) that many felt underpinned markets [Zero Hedge NAILED it].

 

***

 

As a consequence of these developments, investors are now re-considering whether the past seven years have been well spent.  Has exceptional monetary policy merely bridged two low-growth equilibria?  Or, even worse, has it been a pier, leaving the global economy facing a global liquidity trap?  Can more time be purchased?  If so, at what cost and, most importantly, how would that time be best spent?

 

***

 

Despite a recent recovery, equity markets are still down materially since the start of the year.  Volatility has spilled over into corporate bond markets with US high-yield spreads at levels last seen during the euro-area crisis.  The default rate implied by the US high-yield CDX index is more than double its long-run average [background here and here].  And sterling and US dollar investment grade corporate bond spreads are more than 75bp higher over the past year.

Similarly, the former head of the Bank of England (Mervyn King) is predicting catastrophe:

Unless we go back to the underlying causes [of the 2008 crash] we will never understand what happened and will be unable to prevent a repetition and help our economies truly recover.

 

***

 

The world economy today seems incapable of restoring the prosperity we took for granted before the crisis.

 

 

***

 

Further turbulence in the world economy, and quite possibly another crisis, are to be expected.

 

***

 

Since the end of the immediate banking crisis in 2009, recovery has been anaemic at best. By late 2015, the world recovery had been slower than predicted by policymakers, and central banks had postponed the inevitable rise in interest rates for longer than had seemed either possible or likely.

 

There was a continuing shortfall of demand and output from their pre-crisis trend path of close to 15pc. Stagnation – in the sense of output remaining persistently below its previously anticipated path – had once again become synonymous with the word capitalism. Lost output and employment of such magnitude has revealed the true cost of the crisis and shaken confidence in our understanding of how economies behave [Right].

 

***

 

Almost every financial crisis starts with the belief that the provision of more liquidity is the answer, only for time to reveal that beneath the surface are genuine problems of solvency [We told you].

 

A reluctance to admit that the issue is solvency rather than liquidity – even if the provision of liquidity is part of a bridge to the right solution – lay at the heart of Japan’s slow response to its problems after the asset price bubble burst in the late 1980s, different countries’ responses to the banking collapse in 2008, and the continuing woes of the euro area.

 

Over the past two decades, successive American administrations dealt with the many financial crises around the world by acting on the assumption that the best way to restore market confidence was to provide liquidity – and lots of it.

 

Political pressures will always favour the provision of liquidity; lasting solutions require a willingness to tackle the solvency issues.

Former Federal Reserve chairman Alan Greenspan said today that the Dodd-Frank financial bill didn’t fix anything [d’oh!], that we’re in real trouble, and that he’s been pessimistic for a long time:

We’re in trouble basically because productivity is dead in the water…Real capital investment is way below average. Why? Because business people are very uncertain about the future.

 

***

 

The [Dodd-Frank] regulations are supposed to be making changes of addressing the problems that existed in 2008 or leading up to 2008. It’s not doing that. “Too Big to Fail” is a critical issue back then, and now. And, there is nothing in Dodd-Frank which actually addresses this issue.

 

***

 

I haven’t been [optimistic on the economy] for quite a while.

And the world’s most prestigious financial agency – called the “Central Banks’ Central Bank” (the Bank for International Settlements, or BIS) – has consistently slammed the Fed and other central banks for doing the wrong things and failing to stabilize the economy.

If the central bankers’ words aren’t clear enough for you, their actions reveal their desperation.

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mendigo's picture

I work for a small equipment manufactorer which supplies to petrochemical, pharmacuetical and food industries. 

Business rolled off cliff around November. 

Expect to be unemployed soon.

Theonewhoknows's picture
Theonewhoknows (not verified) Mar 3, 2016 8:21 AM

Yup - it was all designed. And the blueprint is a sob to see turning into reality. look http://independenttrader.org/the-blueprint-of-the-fall-of-europe.html

gmak's picture

Up to 9 years of post-secondary education and these clowns still don't get it.  If you borrow to consume, you are stealing from the future. When the future demands to get that money back, you have to BY NECESSITY lower your standard of living. Until that happens, the balloon grows and the inevitable end gets worse - because you keep taking from your future.

 At some point, you go past the event horizon with NO HOPE of ever paying that debt back - and then what do you do? Whoever has that debt takes all your assets.  SOUND FAMILIAR?  If you are not living as far below your means as you can then you are a future slave, as are your children, and likely their children.

If you have no debt and no assets (if you think a house is an asset you own try not paying your property taxes), then there is nothing to compell you into slavehood. 

Paul Kersey's picture

"investors are now re-considering whether the past seven years have been well spent."

What horseshit.  "Investors" (preditors), like Jamie Dimon, Lloyd Blankfein, Larry Fink and Carl Icahn, have never had a better seven years.  They never cared about the Mainstreet economy, and neither did the Fed or the other central banks.  The Fed's actions were all about blowing asset bubbles back up again, and, when you consider that US real estate prices have eclipsed their 2005 highs, and that stock and bond prices are still close to their all time highes, it's been a prosperous and and amazing seven years for the financial engineers and money changers.  

So George, do you really believe that the preditors have run out of financial engineering tricks for making bank?  Well, I don't.  I believe that as long as there's still some blood left, to suck out of world's armies of debt serfs, the elite financial vampires will figure out ways to engorge themselves. It's no accident that Blackrock's portfolio is filled with rent seeking and tax extracting companies.  Look at the rise in Blackrock's stock, or the rise of the stocks in Icahn's portfolio, over the last seven years, and you won't be surprised when eithre Larry Fink or Carl Icahn become either Hillary's or Donald's Secretary of the Treasury.

 

Aussiekiwi's picture

When you reduce interest rates, people think, wow, things must be bad, you reduce again, ditto, again, ditto, the reinforcing message with each interest rate reduction you send is that things are bad and getting worse, so you DON'T spend, you tighten your belt and think, lets wait until next year before buying widgets, applies to everything except housing and other speculative areas because people just see cheap debt on housing as a a speculation opportunity., so you end up with a Bubble while in the day to day real economy you end up with no demand

Eventually you go to ZIRP and NIRP and people really start freaking out about how bad the economy is and hold on to their money ever tighter, maybe even buy a little Gold or hold cash.

farmerbraun's picture

Most of the unthinking people have no money to hold on to.
It is only those who think who realise that the event that they have been expecting is now imminent.
Here in Godzone interest rates are starting to rise as lenders demand risk premiums.
Five year fixed rate money is costing 7%.
Peer -to-peer business loans are at 9%.

blackkitty's picture

That's why we need moar war....moar demand...moar inflation...moar profits...MOAR MOAR MOAR!

MOAR!
https://www.youtube.com/watch?v=7KCF0RvpkXw

blindman's picture

Why the whole banking system is a scam - Godfrey Bloom MEP
https://www.youtube.com/watch?v=hYzX3YZoMrs

Dragon HAwk's picture

what the world needs is a currency that the banks won't accept, but people will

WillyGroper's picture

did you read Graveyard of the Elites, Revenge of the Lower Classes and the Rise of American Fascism?

me thinks Hedges hits the nail on the head.

pegs many acolytes here with their cheerleading.

Weisbrot's picture

how can banks fix what congress broke by repealing Glass-Steagal?

RaceToTheBottom's picture

Oh, so banks did not want Glass-Steagall repealed?

Banks are the goverenment.  The government is the banks.   There is no difference

Spigot's picture

excellent portmanteau!

The Wizard's picture

Central Banking = Central Planning = Manipulated Markets

Reaper's picture

Our financial uebermenschen are modern alchemists promising gold from their machinations.

MrBoompi's picture

The economy doesn't work properly if it is unable to support the consumer spending necessary to supply an adequate monetary velocity and throughput.  You can't bailout the wealthy and take from the other 99%.  This was a counterproductive strategy in the long run.  Although it is nice to be in the 1%, they are going to be targeted in the next crisis as nobody else has the wealth needed to satisfy the insatiable demands of the oligarch class.  

Able Ape's picture

Well, vibrant economies are usually the result of producing and selling goods and NOT the result of mumbo jumbo taught by Ivy League towers of bullshit...

Vendetta's picture

the stupidity of Ivy League graduates I find quite astounding ... great job dumbasses!  I guess common sense and wisdom goes out the window when people think way too much

jeff montanye's picture

as a holder of two ivy league degrees i disagree.

the reason they didn't do the right thing is not because they are stupid but because they are corrupt.

nmewn's picture

Which always leads back to...if it's not blinding incompetence on full display but malicious intent and forethought exposed for the world to see...WHY do people still give credence or even listen to ANYTHING they have to say?

So "one of the technocratic plans" was to destroy the capitalistic health insurance markets, how's that working out so far?...

"Earnings declines, lower enrollment and moderate revenue growth were challenges for the Blue Cross and Blue Shield companies, however, Fitch believes earnings are likely to improve in 2016 due to premium rate increases and benefit redesign aimed at improving underwriting results and regulatory changes," Mark Rouck, Senior Director, Fitch.

Of the 35 BCBS companies, 23 reported a collective $1.9 billion decline in earnings for the first nine months of 2015 and 16 reported net losses. Individual results vary, but Blue Cross and Blue Shield of Michigan ($622 million), Health Care Service Corp. ($442 million) and Highmark Group ($266 million) were the biggest contributors to the year-over-year decline.

In Fitch's view, cost and utilization trends from the state insurance exchanges from the Affordable Care Act have been higher than anticipated and are the primary drivers of declining earnings. In addition, the BCBS companies are challenged by the balance between their non-profit status and the need to make adequate and efficient investments in their business."

http://www.businesswire.com/news/home/20160224005995/en/Fitch-Blue-Cross...

...it's going as I (and we) expected because I (and we) are NOT those who Jonathan Gruber spoke about.

We already knew what it would look like in five years, purposefully destroyed.

BuddyEffed's picture

"all bad news is good news” (because it brought renewed stimulus) that many felt underpinned markets"

Wrong. Bad news is good news for the markets when it's timed release coincides with TPTB being ready to run the short covering on those looking at things on face value.

MFL8240's picture

But the central banks with the help of Hank Paulson were able to make thier banker friends very rich and transfer the loses to the Taxpayers and this was the plan all along!  This is why they need an establishment candidate and hate Trump!

Spigot's picture

I like this part ...

"This underperformance is principally the product of weaker potential supply growth in virtually all G20 economies. It is a reminder that demand stimulus on its own can do little to counteract longer-term forces of demographic change [background] and productivity growth."

Because, you know, like, demographics all of a sudden!