I’ve been listening to satellite radio as I commute to and from the office, coming across songs I haven’t heard in years—and, in some cases, decades—and getting exposed to music I’ve never heard at all.
One song in particular, “It’s All About the Benjamins,” recently caught my attention. I missed this song in its initial incarnation, but I heard about it during the financial crisis, when it became something of a theme song (at least in my mind) for Benjamin Bernanke’s Federal Reserve intervention.
Now, thanks to the miracle of satellite radio and the European Central Bank (ECB)—not to mention a rumored special appearance by Janet Yellen on backup vocals—the song is back. And though Ben is gone, the question today, just as it was during the crisis, is “What will the central banks do?”
All Eyes on Janet Yellen
Think about that for a minute. Years later, with employment and the economy substantially recovered, the real question here in the U.S., at least in the press, remains focused on what Janet Yellen will say at this week’s Federal Open Market Committee meeting. Will she give an end date to the bond-buying program? What about a rate hike? If the Fed’s QE policies were driven by something approaching panic in the immediate aftermath of the crisis, they have been largely justified by success. You can argue that the Fed should have started to pull back sooner, but few now claim that the actions at the time of the crisis were a mistake. But what will the future hold?
In Europe, the situation is even worse. The ECB is starting to look into taking the same sorts of actions the Fed has taken over the past five years (keyword being “starting”). If you believe that the Fed’s actions were only justified by crisis—and the Germans, among others, have never believed that the Fed’s actions were justified even then—what does it mean that the ECB is now looking to go down the same road?
Central Bank Policy Changes on the Way?
It means that Mario Draghi and the ECB have more or less decided that Europe is now in the same sort of crisis environment that forced the Fed to act. It means that the European recovery never actually happened. It means that the situation, in the eyes of the European financial establishment, is not only as bad as it was in 2008–2009, but even worse.
Better late than never seems to be the ECB’s current policy prescription, and the markets seem to be buying it, as the dollar climbs against the euro and the Euro Stoxx Index also rises.
Even if the ECB acts quickly, though, it takes time—typically well over a year—for monetary policy actions to affect the real economy. Pulling the rudder way over won’t lessen the turn radius of an oil tanker. From a political perspective, we will now witness whether the voters in Europe are willing to wait and see whether the policy changes work.
I have said all along that the euro was a political construct, rather than an economic one, and I wrote post-Cyprus that I had changed my position from 51–49 that the euro would survive to 45–55 that it would not. The Scottish referendum and the slowdown of the European recovery move me still further against the euro. We are sliding slowly from “possible” to “too late,” and at some point soon we will cross that line. Get going, Mr. Draghi—because “too late,” from a political perspective, is now visible.