As the stock market crashes and oil prices take a tumble thanks to the panic mode triggered by the coronavirus pandemic, everyone is apprehensive about the consequential economic slowdown or even a recession that is almost certain. While the meltdown can be blamed on multiple factors, one key yet clandestine factor which makes matters truly worse is the inactivity and passiveness of the central banks.
The generally accepted role of the central banks has been to monitor and dictate interest rates and manage a country’s currency. Since the 1980s, they have expanded their operations to cover markets, capital flows, and the health of the general banking system. During the last economic crisis, banks took this relatively new role and filled the void by lowering interest rates and “printing” money to turn the economies around.
But it is important to realize that this is not their original role, and our misplaced expectations have certainly played a role in leading us into the current mess. Although they did pull us out of the last crisis, they can’t repeat the same formula of lowering interest rates as the last time, since the interest rates are already historically low or even negative in some regions.
Printing new money seems to be rendered ineffective as well, as demonstrated over the last few months where trillions have been pumped into the economy without much effect. Controlling the surging inflation appears to be out of their reach, as the slow down of supply chains and the opportunistic hoarding will look to exploit the central banks’ policies of consequence-free creation of new fiat funds, thus setting the stage for runaway inflation.
So all of this begs the question, what is the role of central banks in today’s struggling yet highly complicated economy? As seen in many places, central banks all across the globe have been flirting with the idea of their own cryptocurrencies to evolve and cope with modern-day demands. Some banks have even been experimenting with new currencies, and the announcement of Facebook’s Libra project has definitely accelerated crypto plans almost everywhere.
Although delving into digital currencies will certainly bring its own problems, the time is ripe for the central banks to make bold decisions and dive deep into the world of innovation and try to keep up with the times.
They will have to surrender some of their de facto privileges and go back to just managing currencies rather than stewarding the whole economy. And the introduction of a new type of currency might also finally disentangle the problematic connection of economic activity and capital markets, resolving some of the systemic vulnerabilities built up over the decades.
These tasks, although requiring a reconfiguration of the complex connections within markets, economics and politics, are absolutely necessary no matter how long it takes. But the fact remains the banks need to keep evolving their roles in order to survive these testing times and face the modern challenges head-on.