To say that it has been a wildly volatile year for financial markets would be an understatement ... and we are only in mid-February! Indeed, it has been quite a while since we have seen such intra-day fluctuations -- up and down -- in stocks, bonds, and oil.
Unsurprisingly, this volatility has unsettled many investors, contributing to growing financial insecurity. If it continues, it would also risk aggravating economic insecurity, undermining growth potential and fueling political debates.
All this serves to place an even brighter spotlight on central banks -- from the Federal Reserve and the European Central Bank to the Bank of Japan, the People's Bank of China and others. For example:
- Some observers argue -- wrongly in my opinion -- that the volatility in financial markets is the result of the Federal Reserve's decision in December to raise interest rates by 0.25%;
Some -- and, I suspect, way too optimistically in my opinion -- think that central banks can just push a policy button in order to restore market calm in a durable fashion; and Too many politicians around the world have delegated economic governance to central banks that only have partial tools to tackle the consequential challenges facing the global economy.With all this going on, I thought you may be interested in an excerpt from my new book, The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.
Appearing on page 253, this book extract summarizes the role of central banks in the aftermath of the global financial crisis that violently erupted in 2008. It highlights the extent to which these institutions have been the primary policymaker in many countries; and points to what they can and cannot do going forward.
Central bank activism did not stop with their success in normalizing utterly dysfunctional markets and calming a financial crisis that had brought the global economy to a virtual standstill. Having succeeded, they then found no one to hand off to for the next stage of the economic recovery. As such, they felt that they had no choice but to take on unprecedentedly large responsibilities for the macroeconomy.
This was not a power grab. Nor was it something that central banks were seeking. Instead, with political dysfunction paralyzing other policymakers with better policy tools, central banks felt a moral and ethical obligation to do whatever they could to buy time for the private sector to heal and for the political system to get its act together and assume its economic governance responsibilities
In this new role, central banks did more than assume a leadership role. They also supplied almost the entire content of the policy response, and did so with inherently partial and blunt measures.
Being the only game in town, central banks found themselves pushed ever deeper in experimental policy terrain, and they have stayed there much longer than anyone anticipated or may have hoped for initially.
Policy making often entails difficult trade-offs. This phase of modern central banking has been no different, though with one major qualification: This time around, central banks have not been able to resort to reliable insights and information from historical precedents, analytical models, or past policy experience. There are none that can guide them properly and inspire well-placed confidence.
On the positive side, the central banks' unconventional measures did manage to buy considerable time and space for others to get their act together. They facilitated major private sector balance sheet repair, starting with banks and then corporations and households. They contributed to growth, albeit frustratingly tepid, and, in the case of the United States, to significant job creation.
Like dedicated engineers, central banks constructed the best bridge possible with the limited materials they possessed. But no matter how long a bridge they have built, the right destination was never theirs to deliver on their own.
Excerpt from the New York Times best seller released on January 26th, 2016: The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse, published by Random House. (www.mohamedel-erian.com)
Mohamed A. El-Erian is Chief Economic Advisor at Allianz, the parent company of PIMCO where he served as CEO and co-CIO (2007-2014). He is Chair of President Obama's Global Development Council, a Bloomberg View columnist, and a Financial Times contributor. His first book, When Markets Collide -- also a New York Times best seller -- was named a book of the year by the Economist and a best book of all time by The Independent, as well as winning the Financial Times/Goldman Sachs award for Best Business Book of the Year.
Our 2024 Coverage Needs You
It's Another Trump-Biden Showdown — And We Need Your Help
The Future Of Democracy Is At Stake
Our 2024 Coverage Needs You
Your Loyalty Means The World To Us
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
The 2024 election is heating up, and women's rights, health care, voting rights, and the very future of democracy are all at stake. Donald Trump will face Joe Biden in the most consequential vote of our time. And HuffPost will be there, covering every twist and turn. America's future hangs in the balance. Would you consider contributing to support our journalism and keep it free for all during this critical season?
HuffPost believes news should be accessible to everyone, regardless of their ability to pay for it. We rely on readers like you to help fund our work. Any contribution you can make — even as little as $2 — goes directly toward supporting the impactful journalism that we will continue to produce this year. Thank you for being part of our story.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
It's official: Donald Trump will face Joe Biden this fall in the presidential election. As we face the most consequential presidential election of our time, HuffPost is committed to bringing you up-to-date, accurate news about the 2024 race. While other outlets have retreated behind paywalls, you can trust our news will stay free.
But we can't do it without your help. Reader funding is one of the key ways we support our newsroom. Would you consider making a donation to help fund our news during this critical time? Your contributions are vital to supporting a free press.
Contribute as little as $2 to keep our journalism free and accessible to all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. Would you consider becoming a regular HuffPost contributor?
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. If circumstances have changed since you last contributed, we hope you'll consider contributing to HuffPost once more.
Support HuffPostAlready contributed? Log in to hide these messages.