Market superheroes better not disappoint this time


WORLD economic powers have a rare second chance for a do-over of their haphazard and tardy response to the global financial crisis.

This opportunity is coming thanks to the spread of the Covid-19. Forecasts suggest the epidemic is the biggest threat to the economy since 2007-2009, when global GDP collapsed, jobless rates surged and banks were propped up by the state.

The Organisation for Economic Cooperation and Development warned on Monday the global expansion will be just 2.4%, down from a prior estimate of 2.9%, and said things could get still worse.

Bloomberg Economics expects China’s economy to record its worstever performance this quarter. Last month, global manufacturing tumbled the most since 2009.

It would be a terrible thing for global central bankers to miss this chance. They aren’t epidemiologists and the contagion doesn’t represent a failure of bank regulation, as it did more than a decade ago.

But monetary agencies are on the front line of the world’s economic defences. Signals of support from the US Federal Reserve (Fed), Bank of Japan (BoJ), Bank of England (BoE) and European Central Bank (ECB) sent the S&P 500 surging almost 5% Monday after nosediving last week.

This is a good start and compares favourably to the halting and fragmented initial response to the credit squeeze that began in mid- 2007 and escalated after the bankruptcy of Lehman Brothers Holdings Inc in September 2008.

Group of Seven (G-7) finance ministers and central bankers held a teleconference yesterday and hopes are high among investors that some kind of coordinated or complementary steps will be forthcoming to quell market angst.

Policymakers dare not disappoint. The mere fact the call is happening, with a statement expected to follow, is encouraging. It took the aftermath of Lehman’s failure — more than a year after the crisis began — for central banks to coordinate on rate cuts.

Incredibly, the ECB raised rates two months before Lehman imploded in what counts as one of the all-time gravest policy errors.

In an instant on Oct 8, 2008, the Fed, ECB, BoE, the Bank of Canada, the Swedish Riksbank and the Swiss National Bank announced reductions in borrowing costs.

The BoJ expressed its support in the same statement and China followed with a cut the same day.

This action was all the more significant for Beijing’s participation. Though not part of the G-7, China’s absence from any joint thrust would be unfortunate, considering the virus outbreak is traced to that country.

The West should be solicitous and do all it can to lure the People’s Bank of China to participate. It would show that, for all the talk about the decoupling of China and the US, when it comes to managing a mutually beneficial outcome, the two superpowers can summon the wherewithal to cooperate.

The Fed, first among equals, set the tone last Friday with a rare statement from chair Jerome Powell signalling help was on the way.

The remarkable thing about the three-line comment was that it came from Powell personally. In previous instances where the Fed has published such communication, it’s been in the name of the Board of Governors or the rate-setting Federal Open Market Committee.

Powell put his leadership on the line. Good for him; too many junior Fed officials were in the field giving mixed messages.

Central bankers alone can’t turn the tide in an epidemic. Fiscal weapons need to be deployed. There’s also the fashionable trope that monetary policy is becoming less effective as interest rates grind lower and that new tools are needed.

That may all be true. But is it an excuse to do nothing? Investors’ anticipation of stimulus proves that the mere prospect can lift confidence, even if only over the short term.

There may be plenty of carping that central banks are out of ammunition, but it was their efforts that saved the world from a greater trade-war induced slowdown last year, as I’ve written. Now is the time to build on that template.

Don’t put too much faith in the globalisation-in-reverse hype. Everyone has too much at stake to go their own way. — Bloomberg

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.