From Europe to China, economic measures to boost growth are failing – but the Bank of Japan is searching for answers between the pages of the children’s fantasy ‘Peter Pan’.
Modern economic management depends on a complex mixture of feigned infallibility and the ability to maintain confidence in the face of contradictory evidence. In recent times, however, the economic priesthood has begun to suffer a crisis; it can no longer trick the audience into believing in their capacity to solve current problems.
First, the manner of policy-making is unconvincing. John Maynard Keynes’s fear that “confusion of thought and feeling leads to confusion of speech” is evident. The US Federal Reserve’s attempt to normalise interest rates has contributed to instability. Speculation, prompted by comments of various current and ex-Governors, of a delay or halt in rate increases, reversal, a new QE program or negative interest rates has compounded confusion.
Homespun wisdom (such as “growth does not die of old age”), and the suggestion that the Fed wants to put up rates so they can cut them again in the new coming crisis, has not proved reassuring.
The European Central Bank (ECB) looks increasingly impotent. Incantations of “whatever it takes”, which once had the authority of Holy Scripture, are no longer effective. The ECB has failed to date to deal with weak banks and €1.2trn-plus (£1trn) of non-performing loans (around a quarter of that in Italy). Instead, it recently called for European Union banking laws to be changed to permit discretionary payments of dividends and bonuses to investors where it would not be eligible to do so, for example if a bank posts losses. This is odd, given that suspension of payments is specifically designed to enhance bank capital in the case of financial difficulties.