War makes rattling good policy; but peace is poor policymaking. Novelist Thomas Hardy’s adage—that war, unlike peace, makes history interesting—can be adapted to the current state of the global financial system. War is straightforward. Keeping the peace is confusing.
Two years ago this week, when Lehman Brothers collapsed and unleashed the worst crisis in 70 years, a war was raging. The best way to fight it was to pump unprecedented sums of money into the economy, precisely what central banks and treasurys did. With these measures, the war, in financial markets at least, ended. In September 2009, the world looked forward to celebrating the peace. Yet, that peace has proved tricky: Policymakers, drawn in different directions, can’t figure out how to manage it.
First, some still insist on priming the pump to deliver growth. In a scenario of unemployment and supposed deflation, the US Federal Reserve is brainstorming for new counteroffensives, instead of eking out a much needed exit strategy. President Barack Obama isn’t calling a retreat either: Last week, despite a yawning budget deficit, he promised more fiscal measures to stimulate business activity.
That brings us to, second, fiscal stimulus. Starting in Dubai in November, bond markets, realizing that the burden of indebtedness had only shifted from the private sector to the public, haven’t been happy. This displeasure, which embroiled Europe in a sovereign crisis in May, could resurface as worries about Europe’s banks mount.
That’s why Europe is staying vigilant. Germany and the UK are tightening their belts. But the US doesn’t share this priority.
Financial reform, third, has taken a back seat. US lawmakers diluted their attempts at regulation this year; regulators, attempting to craft new rules for banks this weekend, seem happy to implement these rules as late as 2018. Talk of global imbalances is off the radar.
In the advanced economies, the panic of war may have focused attention on clear objectives, but the complacency of peace is now blurring aims and jumbling priorities. Such policy uncertainty will only exacerbate economic uncertainty. The lack of fiscal and monetary prudence will hurt emerging economies.
The silver lining here is that, thanks to their robust recoveries, these developing economies have some policy freedom to chart their peace forthrightly. They should make the best of it.
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