PIMCO’s Mohamed El-Erian was chosen to give the Homer Jones Memorial Lecture in front of the Federal Reserve Bank of St. Louis yesterday, an important distinction given to some of the country’s most notable economists.His topic of choice? Central banks—specifically the Fed, the European Central Bank, and the Bank of England—are losing power over the economy, and fast.
While El-Erian credits central banks with saving the world from two global depressions, they are at the limits of their powers to restart global growth. Further, that is a task they should not be responsible for anyway:
Having succeeded in sharply curtailing the catastrophic risk of a global depression, the challenge for unusual central bank activism is now extending beyond the inability to deliver economic outcomes…
Simply put, these institutions do not have the instruments or expertise to deal with the challenges of labour training and retooling. They cannot improve labour market flexibility and mobility. And they cannot impact the country’s education system. Yet these challenges should, indeed must, be successfully confronted if we are to avoid the curse of unemployment becoming deeply embedded in the structure of the economy and, therefore, much harder to solve.
In fact, he believes, more central bank activism—further QE, more interventions, etc.—are proving unsustainable and damaging to the financial system:
In the case of three institutions in particular (the Bank of England, the Bank of Japan and the Fed), they also change the balance between “safe” and other assets in the financial system…In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!
But instead of attacking the Fed for doing too much, El-Erian does just the opposite. He calls out politicians and international organisations for failing to “step up to the plate” and fix problems like growth and debt sustainability:
It is high time for other agencies, in both the public and private sector, to step up to the plate. They should – indeed, must – use their better-suited instruments to help lift impediments to sustainable non-inflationary growth and job creation. In other words, it is about improving the prospects for higher economic activity and, therefore, “safe de-leveraging.”