Our uncomfortable ride with central bankers who can't take us home again: Neil Macdonald

The world's central banks responded to the Great Recession by printing money. Lots of it. The practice drove down interest rates to nearly zero, robbed savers of return on their investments and rewarded those who live beyond their means. Things were supposed to return to normal eventually. Well, don't count on it.

The great post-Great Recession money-printing bonanza was supposed to be temporary

Chair Janet Yellen decided this week to keep the U.S. Federal Reserve's interest rate where it is, saying the U.S. economy isn't yet ready to withstand a modest increase. (Gary Cameron/Reuters)

We can all, more or less, put a dollar amount to what we're worth.

The value of that money is another question. 

Money is the ultimate confidence game; $10 is worth $10 because we all agree it is worth $10, and for no other reason.

Common sense would seem to dictate that creating unimaginable amounts of new money, the way central banks have been doing since the Great Recession, would erode the value of a dollar, or a euro, or a yen.

The U.S. Federal Reserve alone has printed about $3.8 trillion since 2009. That's enough to buy 3.8 million million-dollar homes.
The U.S. Federal Reserve has printed about $3.8 trillion since 2009. (Reuters)

Put another way, the American central bank has printed more money than the entire Canadian economy generates in two years. Most of it was spent buying U.S. government treasury bonds — basically creating money with one hand of government and handing it to the other to spend.

Of course, the money printing distorted everything. As intended, it drove down interest rates to nearly zero, punishing old-fashioned, "virtuous" behaviour, robbing savers of return on their investments, while rewarding those who live beyond their means and bailing out scoundrels.

Risky behaviour

As intended, the creation of that money encouraged even more risky behaviour. Stock markets set new records, floating on all that cash. People bought homes they probably couldn't afford (to a point that has scared the government of Canada; our central bank has pursued low interest rates, too).

Some conservative economists warned that the American money-creation program, called quantitative easing, carried inherent perils — that it was monetizing government debt, among other things, and therefore encouraging profligacy, basically telling Congress to spend away, we'll just print more cash.

But the centre has held. Inflation has not materialized. A dollar is still worth a dollar, because we all agree it is. The world's biggest central banks upped their confidence game, and confidence is still there, at least so far.

Anyway, we were told by central bankers and liberal economists, quantitative easing was only a temporary measure, and things would return to normal as soon as possible.
The U.S. Federal Reserve in Washington, D.C. (Reuters)

The U.S. Federal Reserve put that in writing two years ago, issuing a communiqué titled Policy Normalization Principles and Plans.

Basically, the U.S. central bank promised it would eventually shrink its balance sheet, reeling in the trillions it had created, and nudging interest rates back to roughly three per cent or so — still low, but a return from the surreal world of basically free money. (The Europeans have actually introduced the concept of negative interest rates, which is mind-bending.)

The big question was whether the Fed could "manage the unwind," shrinking the money supply and raising interest rates without massive disruption to a distorted system.

And indeed, each time the Fed has signalled it intends to begin "normalizing," and tapering economic stimulus, the markets have soiled the bed. There's even a term for it: the "taper tantrum."

So, each time, the Fed has backed off, indicating things are still fragile, and more time might be needed.

Unsettling closing line

Then, a few weeks ago, former Fed chairman Ben Bernanke, the person most responsible for all that U.S. money-printing, wrote a remarkable article on his blog at the Brookings Institution.

In it, Bernanke muses that reeling in all those trillions of dollars might not be such a good idea after all.
Former U.S. Fed chairman Ben Bernanke suggested in a recent blog post that he doesn't know if it's possible to unwind the stimulus policies triggered by the Great Recession. (Larry Downing/Reuters)

In a rather unsettling closing line, he says: "Maybe this is one of those cases where you can't go home again." 

Actually, if you read carefully what he wrote, Bernanke is admitting he really doesn't know the answer, which is almost even more disturbing, although it shouldn't come as a surprise.

The Fed is basically a group of near-genius-level intellects who try to manage the money supply, something so vast and complex and fragile that it's frightening to ponder at any length.

Disastrous mistake

Monetary policy is a bit like string theory, which posits the existence of multiple dimensions and universes; you have to assume that your basic assumptions might be wrong.

Certainly the Fed's basic assumptions have been thunderingly wrong in the past. Former chairman Alan Greenspan's reluctance to regulate Wall Street's ferocious greed was a disastrous mistake.

As it turned out, Greenspan and the American consumer bought into a myth. Housing prices could not only fall, they could implode.
Alan Greenspan's reluctance to tighten regulations on Wall Street proved to be a big mistake. (Kevin Lamarque/Reuters)

Still, economists such as McGill University's Chris Ragan and Laurence Booth at the University of Toronto's Rotman School are unbothered by Bernanke's new proposal.

Both seem to see it as a normal evolution in thinking. It has, they say, become clear that new mechanisms have emerged to control interest rates, which is what matters.

Massive money-printing, says Ragan, "put us into unknown territory. That was a concern. At the time we felt we could get back home and onto the comfortable couch.

"But the unknown territory is increasingly comfortable. Do we really need to get back?"

'A bad joke'

Desmond Lachmann, a former managing director at Salomon Smith Barney and former senior director of the International Monetary Fund, has another view.

He says the world's central banks have "created the mother of all bond bubbles and contributed to gross mis-pricing of risk around the globe.

"To talk now of how the Fed might alter its policy instruments to minimize risk seems to be a bad joke, considering how much risk to the financial system that they have created."

In other words, eminent experts disagree. They always do.
Traders work as Federal Reserve chair Janet Yellen speaks on a television above the floor of the New York Stock Exchange. (Lucas Jackson/Reuters)

And the ordinary punter, as the British say, is at the mercy of unelected people who meet in secret in our central banks and make decisions of inestimable importance.

And we have to trust them. The alternative — a central bank under direct political control or the abolishment of central banks altogether — is simply not realistic and would rupture market confidence in the currency. They did manage to contain the damage of the great collapse eight years ago.

Still, being in a position where "you can't go home again" doesn't sound particularly comforting, does it?


  • An earlier version of this story said the amount of money the U.S. Federal Reserve has printed would be enough to buy 38 million million-dollar homes. That figure was missing a decimal point: the correct figure is 3.8 million.
    Sep 29, 2016 1:05 PM ET


Neil Macdonald is a former foreign correspondent and columnist for CBC News who has also worked in newspapers. He speaks English and French fluently, as well as some Arabic.