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The Changing of the Monetary Guard

NEW YORK – With leadership transitions at many central banks either under way or coming soon, many of those who were partly responsible for creating the global economic crisis that erupted in 2008 – before taking strong action to prevent the worst – are departing to mixed reviews. The main question now is the extent to which those reviews will influence their successors’ behavior.

Many financial-market players are grateful for the regulatory laxity that allowed them to reap enormous profits before the crisis, and for the generous bailouts that helped them to recapitalize – and often to walk off with mega-bonuses – even as they brought the global economy to near-ruin. True, easy money did help to restore equity prices, but it might also have created new asset bubbles.

Meanwhile, GDP in many European countries remains markedly below pre-crisis levels. In the United States, despite GDP growth, most citizens are worse-off today than they were before the crisis, because income gains since then have gone almost entirely to those at the top.

In short, many central bankers who served in the heady pre-crisis years have much to answer for. Given their excessive belief in unfettered markets, they turned a blind eye to palpable abuses, including predatory lending, and denied the existence of an obvious bubble. Instead, central bankers focused single-mindedly on price stability, though the costs of somewhat higher inflation would have been miniscule compared to the havoc wrought by the financial excesses that they allowed, if not encouraged. The world has paid dearly for their lack of understanding of the risks of securitization, and, more broadly, their failure to focus on leverage and the shadow banking system.