THE ONLY GAME IN TOWN

The chair of Barack Obama’s Global Development Council warns that the economy is bound for more bumpiness, stress, and course-altering ahead, “potentially quite suddenly.”

El-Erian (When Markets Collide, 2008) charts the changing role of central banks in national economies and the global economy at large. Their overarching mission is to provide their home nations with a stable currency and, beyond that, stable monetary and financial operations—macro goals that are defined by government but then effected by bankers. The bankers have lately exercised more and more autonomy, though, without much direct political control and with ever expanding responsibilities to govern the “fate of the global economy.” In the case of the Federal Reserve, for instance, stability is understood to involve providing for stable prices, economically productive interest rates, and a thriving job market while reducing risk—all good goals but hard to contain under one roof. In the new climate of a post-recessionary nervousness and a sluggish recovery without the elastic rebound of previous ones, the author suggests, we seem to be in a different mode than the business cycle of old. Consequently, central banks are experimenting, even making things up as they go along, in order to jump-start economies, for instance, by putting into place negative interest rates and other “unconventional monetary policies” without any precedent or historical examples to follow. The natural result is instability from above and below, from the supply side and the demand side, and a “new normal” that the author wishes could be seen as a “new abnormal.” Central banks, their briefs thus much expanded, must do what they can to contain market volatility. As El-Erian’s discussion moves on, it becomes increasingly technical so that, by the end, readers must contemplate the challenging implications of, say, limiting exposure to “any specific set of securities that has a repeated history of suddenly losing market liquidity.”

Fiscal-policy wonks will find this look at the financial system illuminating, though ordinary investors and civilians will find it daunting.