As Ben Bernanke, chairman of the Federal Reserve, heads to Capitol Hill on Thursday, we should sympathise with the challenges facing central bankers around the world. Once praised for facilitating high growth and low inflation, they now find themselves in a potential “lose-lose” situation: should they risk fuelling future inflation in order to avoid a recession induced by a market-driven credit crunch, or maintain low inflationary expectations at the risk of both depressed economic growth and serious financial market dislocations?

Too many observers have cited changes in personnel as an important part of the explanation for this shift. Tempting as this is, it is not appropriate. The better approach is to analyse how far global financial transform­ations have eroded the potency of trad­itional central bank tools.