They called it the “Greenspan put,” and it reassured a generation of traders. If economic storms were gathering, the top central banks — most important the Federal Reserve, then led by Alan Greenspan — could and would step in to prevent disaster.
Because the traders effectively had a put option, they could safely bet that the markets would survive even the worst crisis.
This year, volatility has soared and share prices have fallen sharply, in part because few think there is a Bernanke put, or, for that matter, a Trichet put. It is far from clear that the authorities could stem a new panic, and even less clear that many would be willing to try.
In other words, the slogan for markets as the International Monetary Fund and World Bank meet this week in Washington could well be, “You’re on your own. Don’t count on anybody to bail you out.”
The situation is thus drastically different from that of three years ago, when I.M.F.-World Bank meetings served as a forum to find joint strategies to ameliorate the financial crisis that had followed the collapse of Lehman Brothers.
Now there appears to be division and disarray within Europe and the United States. Central bank efforts to help the economy have become politically controversial, and there has been infighting at both the European Central Bank and the Federal Reserve.
At the European Central Bank, the departing president, Jean-Claude Trichet, has faced sniping from Germany and the resignation of Jürgen Stark, a German member of the bank’s executive board. Mr. Stark cited personal reasons, but his departure was widely interpreted as a repudiation of the bank’s purchases of bonds issued by troubled European nations.
At the Fed, Ben S. Bernanke, the chairman who succeeded Mr. Greenspan, has faced dissents within the central bank on recent efforts to stimulate the economy.
There was a long-lived bipartisan consensus in the United States — it lasted at least from 1992, when Mr. Greenspan helped banks recover from bad loans to Latin American nations, through 2008 — that the Fed was expected to steer the economy and would be treated gently by politicians.
Presidents tended to reappoint Fed chairmen, even those appointed by predecessors of the other political party, in part because of fear that markets would be outraged by any effort to politicize monetary policy. There have been six presidents since Paul A. Volcker took over at the Fed in 1979, but Mr. Bernanke is just the third chairman.
That consensus seems to have vanished, with candidates for the Republican presidential nomination vying with one another to show their hostility to Mr. Bernanke, even though he is a Republican who previously served as the chief economic adviser to President George W. Bush.
One candidate, Mitt Romney, has said he would ask Mr. Bernanke to resign. Another, Rick Perry, the governor of Texas, suggested that Mr. Bernanke might be trying to stimulate the economy to aid President Obama’s re-election campaign. On Tuesday , Republican Congressional leaders took the extraordinary step of publicly calling for the Fed to do no more.
That did not stop the Fed from announcing some initiatives on Thursday, but they were relatively small and disappointing to investors. Share prices fell sharply after the announcement.
The political challenges may make it harder for the Fed to do much more over the next year, even if the economy is weaker than expected. Similarly, Mario Draghi, the Italian central banker who will take over from Mr. Trichet on Nov. 1, will be under great pressure from Germany to avoid actions that might increase inflation, even if they may be needed to prevent a new financial collapse.
At the same time, European governments have found it hard to agree on effective action. A July 21 agreement, which was supposed to provide money for Greece while limiting the losses for banks, has yet to be put in place, and markets seem convinced that a Greek default is inevitable. Italy is the latest country to find bond markets hesitant to provide funds.
European banks, many of which were slower than American ones to raise capital when investors grew more friendly in 2010, may need to be rescued again precisely because of fears that the rescuers of 2008 — national governments — may not be able to meet their obligations.
At a meeting of European finance ministers last week, Timothy F. Geithner, the United States Treasury secretary, pleaded for coordinated action. “Governments and central banks need to take out the catastrophic risk to markets,” he said. After he left, Austria’s finance minister said Americans should stop lecturing Europe.
Those countries that can borrow money easily and cheaply — most important, Germany and the United States — are reluctant to do so, even with the threat of a new recession seeming to grow. The Germans argue that other European nations must cut back spending to regain competitiveness, that there is no gain without pain. Mr. Obama has proposed a new stimulus program, but it faces uncertain political prospects only weeks after the two parties agreed to seek consensus on ways to reduce government spending.
Large banks around the world have seized on the disarray of governments to begin campaigns to reduce regulation, complaining that new rules adopted after the 2008 debacle threaten growth. They want capital rules eased and hope that few will remember it was their excessive risk-taking, relative to the capital they had, that helped to create the 2008 disaster and that threatens a new one.
Some politicians join in that complaint, saying current problems stem from excessive government interference in the economy, particularly in free markets.
Those who remember the “Greenspan put” may find that argument odd. It is the fear that governments may not ride to the rescue that seems to have unnerved markets.
Perhaps it is the low expectations that provide the best hope for some kind of success at the meetings of the I.M.F. and the World Bank. Three years ago, it was widely expected that governments and central banks could act cooperatively and effectively. Now any indication they can still do so would come as a pleasant surprise.
Source: New York Times