Friday, December 13, 2013

Ben Bernanke and its legacy: The foundation of a new global macroeconomics

Although it is still a matter of research, as time goes by and history says its word, the financial crisis of 2018 will probably be considered a benchmark concerning the relevance of Banks regulations for risk seeking behavior, and the role of Central Banks to save the economy from the worst: a lasting painful economic depression. The Chairman of the Board at the US Central Bank, Mr Ben Bernanke( 2006-2014)and his decisions, were crucial to change the course of the recession. Those decisions will be considered at the core of policy lessons arising from this event . It is quite different to make decisions for keeping inflation within the target, and to make decisions aimed at solving a financial crisis of global scale.. The first decisions back then(2006), was to follow up the underway normalization process increasing the interest rate, which was still well below the range of 4-6% for the 2004-to 2006 period, suggested by the Taylor Rule. Thus, it was necessary to move on adjusting upward the interest rate. Higher interest rate took its toll months later, on mortgage payments and default rates, and the second part of the history began. The worst financial crisis after that one of 1929, started off in the final quarter of 2008. The Federal Reserve had to switch to a recession mode. In December 2008, the interest rate was set at the range of 0-0,25%.Thus, less than two years after being in office, there was a unprecedented change from moderating inflation, to save the financial system from collapse. Soon became self evident that Conventional Monetary policy, was not enough to solve the liquidity problem , while there was still pending a solvency issue . Too little too late was the sentiment among key analyst at that time. A new path was open to try unconventional monetary policy. This meant a monetary Policy looking beyond inflation rates, and focused on the financial system as a whole, and markets expectations, coupled with a new ability to manage both at the same time (communicational skills). So, it was done with some principles (to select carefully interventions, safety net for controlling panics reactions , keeping a minimum above zero for interest rate) ,and a variety of instruments all based on diversification which included different time span, assets types, institutions, currencies, collaterals alternatives. It was like to implement an strategy designed to attack the systemic risk, step by step dismantling its main sources to a smaller fraction of it, in such a way to improve the chances of controlling the overall situation as a preliminary condition to manage expectations .- The different markets reacted each one favorably at its own time :equity(business value), labor,(unemployment rates) goods(consumer sentiment).They all started to consolidate its initially fragile gains .Economic growth has getting better traction, inflation kept below target, and now it is near the beginning of the exit strategy from unconventional to conventional monetary policy. A new macroeconomic is in place for the global economy. The economy got out of a severe financial recession sooner than expected, and five years later it looks back with a sense of relief for what could have been worse than 1929.-