Central banks and monetary belligerence

President Bush was an activist during his last months of mandate and also Obama since his first days in the White House. But greater belligerence corresponds to the Federal Reserve and its Chairman, who happens to be one of the most reputable experts in the great recession, he knows the subject. This crisis origin is financial, the role of central banks is therefore doubly vital. And the goal of the Monetary Authority has been to ensure liquidity and support the solvency of financial institutions to prevent a meltdown (Black Swan) of unpredictable consequences. The storm unleashed by the collapse of Lehman was a warning sign: no more joking.

Since then the belligerence of central banks around the world, sometimes in a concerted manner and always following their own initiative, has been constant, one way or another, with reductions of interest rates of intervention and loan system, leaving them to zero on an ongoing basis, which is an apparent anomaly that indicates a situation of emergency. They have also bought assets from decreasing quality with the course of the years to provide liquidity to financial institutions and to overcome any situation of non-payment and collapse.

For the federal reserve and most of the central banks these actions are part of their goals and ordinary tasks. Not in the case of the European Central Bank, whose power is more limited and its counselors more reluctant to the monetary belligerence that allows supporting public deficits of the countries members of the system.

By the end of 2013, on the 6th year of the current great recession, the Federal Reserve predicts that it may have come the time to leave the financial crutches that has provided to the system for six years. Before the warning the patient has noticed the fear to stop using analgesics. The FED looks at various indicators when it comes to acting, including the unemployment rate, which can recover to year levels before the crisis, below 7%, although the structure of employment after this crisis is harder and more precarious.

In Europe the outlook is different; the belligerence of the ECB has been lower than the other bankers’ and governments (and the ECB members) don’t have homogeneous positions. Their unanimous agreement in the Council in early July warning that rates may fall and certainly will not rise over a long period of time, indicated the way out of the recession is likely, but it will be slow and full of uncertainties.

When central banks will stop being belligerent, it will be because the recession has taken over the landscape and become another depression or because it has been overcome to open a new phase of growth, with reasonable prospect of consistency and stability. In any case, bear in mind that the central bankers’ words always have consequences.