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March 25, 2013 10:59 pm
It was like a veteran’s reunion for policy makers who fought on the frontline of the global financial crisis.
But when Ben Bernanke, chairman of the Federal Reserve, joined Sir Mervyn King, governor of the Bank of England, and several other leading economic figures to discuss lessons from the crisis in London on Monday, much of the focus was on a member of the audience: Mark Carney.
The incoming Bank of England governor, who succeeds Sir Mervyn at the end of June, heard warnings from the policy making old guard against expecting too much from central banks.
As expectations mount in the UK about Mr Carney’s ability to help revive the stuttering domestic economy, the outgoing Canadian central bank governor heard several speakers at the London School of Economics caution against relying too much on monetary policy to spur growth.
George Osborne last week reiterated that he was relying on “monetary activism” to produce the meaningful growth that has eluded the UK since the financial crisis began.
Mr Carney has suggested a host of radical ideas to achieve what he has termed “escape velocity”. Mr Osborne has amended the BoE remit with some of the governor-designate’s ideas in mind and the new framework allows policy makers to prioritise growth, even if inflation is above target, provided price pressures remain broadly under control.
However, Axel Weber, the chair of UBS and former president of Germany’s Bundesbank, warned of “unintended consequences and side effects” of ultra loose monetary policy.
“Central banks are talked about as the only game in town,” he said, adding that if this was the case, then monetary authorities’ inflation-fighting remit could get lost.
Another of the panellists, former US Treasury secretary Larry Summers, expressed concern that, just as the lessons of the Great Depression had been lost in the mists of time, “the lessons of the 1980s and 1990s about the importance of credibility and resisting inflation could be forgotten”.
However, Mr Summers later stressed the importance of prioritising growth while unemployment remains high. Another of the panellists, Olivier Blanchard, chief economist of the International Monetary Fund went further, saying that “the light in this crisis” had come from the activism of the world’s major central banks.
“Without Ben, Mervyn and Mario we’d be in a lot worse shape than we are today,” Mr Blanchard said.
Ben Bernanke, Federal Reserve chairman, took aim at critics in emerging markets who have lambasted the US central bank for its ultra-loose monetary policy and accused it of precipitating a currency war.
Mr Bernanke, who will attend a private conference of policy makers at the BoE on Tuesday and Wednesday to mark the end of Sir Mervyn’s 10-year governorship, defended the Fed and other central banks against accusations of competitive devaluations, or currency wars.
The Fed chair implied that he supported the recent actions of the Bank of Japan by saying that the policies of the major central banks were “enrich thy neighbour”, not “beggar thy neighbour” actions.
“The distinction between monetary policies aimed at domestic objectives and trade-diverting exchange rate devaluations or other protectionist measures is critical,” he said. “The former can be mutually beneficial, the latter are not.”
Though the MPC has not sanctioned further gilt purchases, or other actions, since last July, the Bank of England has presided over a weakening of the pound in recent months.
Sir Mervyn said earlier this month that the pound was weak enough.
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