For a world so confident that central banks can solve almost all economic ills, the dramas unfolding in Greece and China are sobering.
“Whatever it takes,” Mario Draghi’s 2012 assertion about what the ECB would do to save the euro, best captures the all-powerful, self-aware central bank activism that’s cosseted world markets since the banking and credit collapse hit eight years ago.
From the US to Europe and Asia, financial markets have been cowed, then calmed and are now coddled by the limitless power of central banks to print new money to ward off systemic shocks and deflation.
But even if you believe central banks will do whatever it takes - to save the euro, stop the recession, create jobs, boost inflation, prop up the stock market and so on - it doesn’t necessarily mean it will always work.
Draghi himself merely pleaded for faith on that score three years ago when he added, “Believe me, it will be enough.”
Critically, given the direction of events in Athens, his celebrated epigraph was preceded by “Within our mandate...”
And so the prospect of the European Central Bank potentially presiding over, some say precipitating, the first national exit from a supposedly unbreakable currency union will inspire a rethink of the limits of Draghi’s phrase for all central banks.
Of course, the ECB does not want to push Greece out of the euro. But ‘whatever it takes’ may just not be enough to preserve the integrity of the 19-nation bloc if the ECB’s mandate prevents it from endlessly funnelling emergency funding to insolvent Greek banks.
And as long as the Greek government is at loggerheads with its creditors, the central bank can’t wave a magic wand of monetary support without breaking its own rules.
The ECB continues to insist it will do all in its power to prevent contagion to other eurozone markets and there’s little doubt it will make good on that. But the problems stemming from a Greek exit are not of financial seepage but of political contagion to other euro electorates tiring of austerity. And that sort of contagion is beyond ECB control.
Switch across the planet and another test of central banking determination and effectiveness is playing out.
The once awesome ability of the People’s Bank of China to micro-manage the world’s second largest economy and one of the globe’s biggest stock markets is being sorely challenged.
Having helped inflate a bubble-like doubling of Shanghai stocks with easy money over the past year, the PBOC, along with government regulators, is now desperately trying to control a sudden implosion that’s wiped 30% and $3tn off equity values in just three weeks.
The worrying bit is that after cutting interest rates and bank reserve requirements in late June and then last weekend injecting liquidity into a state-backed margin finance company, the PBOC barely got any market response.
Economists at the Bank for International Settlements warned on June 28 that a loss of control by central banks, now painfully short of new ammunition to deal with either a major market crash or a sudden world downturn, was one of the most worrying threats to the world financial system.
