Reconsidering monetary moves since the meltdown

April 29, 2015

Governments and central banks have taken extraordinary steps since 2008 to keep the global financial system from unraveling. But almost seven years on from the crisis, a panel of regulators and money managers at the Global Conference still couldn't agree on whether those measures staved off a worse disaster — or just delayed it.

Dimitri Demekas, assistant director in the monetary and capital markets department of the International Monetary Fund, said the U.S. Federal Reserve "got it right" in moving quickly to slash short-term interest rates to zero and follow up with massive "quantitative easing," given the risks the economy faced.

That’s not how it looks to Tad Rivelle, group managing director and chief investment officer for fixed income at money manager TCW. "I think they have gotten it wrong," he said, because by manipulating interest rates, the Fed has promised people a host of things that he believes they can't possibly deliver simultaneously, including 3 percent economic growth, 2 percent inflation and higher asset prices.

"Central banks are very good at kicking the can down the road and telling us it's all going to get better, [but] every cycle has died a violent death, and this one probably will too," Rivelle said.

Scott Minerd, chairman of investments and global chief investment officer at Guggenheim Partners, said the dramatic moves by the Fed and the European Central Bank to push interest rates down — even to negative levels on long-term bonds of some European governments — were a reaction to the lack of additional fiscal-stimulus measures by the U.S. and euro zone governments.

"The only way to try to get the economy to move is to overwhelm all of this with massive doses of liquidity," Minerd said.

Paul Sheard, chief global economist at Standard & Poor's Ratings Services, argued that the Fed's decision to flood the financial system with money made sense as a preventive move, to keep the U.S. from falling into Japan-style deflation.

But Rivelle likened the Fed's response — buying trillions of dollars in Treasury and mortgage bonds in the open market to hold down longer-term interest rates — to putting out a fire with water, then failing to turn off the hose.

"Long ago, I think the time came for essentially the Fed and central banks in general to say, 'You know what, there's too much to figure out, and we're no good at figuring it out,' " Rivelle said.

Panelists also focused on the possibility that Europe's financial system could face another blow if impoverished Greece were to default on its debts and pull out of the euro zone. After allthe European Central Bank has done to slash interest rates, a Greek exit could raise more doubts about central bank policies post-2008.

"The direct fallout would probably not be that big," Sheard said. "But it would put a lie to the idea that [unified] Europe is like the Hotel California: You can check in, but not out."