Recession puts central bankers in the spotlight

Glenn Stevens, the governor of the Reserve Bank of Australia, is an accidental hero of the global financial crisis.

A career central banker, Stevens, 52, once described himself in a newspaper article as “not a particularly great risk-taker”. On the day he was appointed to the job, August 1, 2006, the exasperated photographers crammed into his spartan office were forced to ask him to smile for the camera, according to local media reports.

“That’s a bit hard. I’m a central banker,” he deadpanned.

Then, on October 6 of last year, Stevens was thrust into the spotlight. Australia became the first G20 nation in the wake of the financial crisis to raise interest rates, signalling an upbeat view of future economic activity. It was not a widespread sentiment.

The surprise hike came as US and euro zone policymakers were still crossing their fingers, hoping their economies had escaped recession in the third quarter. It was hailed as a vote of confidence in a still uncertain recovery, pushing gold prices to a record high and global shares up nearly 2 per cent.
In the end, Australia was among the few G20 nations to sidestep a brutish recession.

“We have long argued that Australia is the canary of the global economy,” RBC Capital Market senior economist Su-Lin Ong said at the time. “If the Australian economy kept singing, then it was likely the world economy would avoid falling into the abyss.”

It has not fallen so far.

Under ordinary circumstances, central bankers like Stevens aren’t major newsmakers in world affairs. But the combination of the financial nervous breakdown and the uneven economic recovery since has turned them into the equivalent of military generals waging a war. The question is whether, in the face of political opposition, they will deploy the weapons at their disposal.

Anyone doubting central bankers are in the hot seat need only look at the fix US Federal Reserve Chief Ben Bernanke found himself in. Nominated by President Barack Obama for a second term, he had been widely expected to get the Senate support he needed when a surge of public anger at big banks and their bailout made the vote look a lot closer.

What Bernanke, who queaked by, and his fellow central bankers do from here on will likely have important implications not just for their individual countries but also for a $60 trillion global economy that is, for better or worse, becoming more financially inter-connected.

The main challenge facing central banks is how to keep economic growth going without inflating the next bubble. Put starkly, that means jacking up interest rates from their current nonexistent levels, as Australia, Israel and Norway have now done.

It also means halting the spread of cheap money, which has turned out to be the financial equivalent of crack cocaine.

Weaning the world off the liquidity drug won’t be easy. The two most important economies, America and China, are moving at different paces, perfectly exemplifying the two-speed recovery that seems to be taking hold.

China and other emerging nations are zooming. The United States and Europe more or less remain stuck in neutral gear -- and face rising unemployment and a potentially crushing debt burden.

Global financial markets have been further rattled by China’s moves to tighten policy settings -- raising the amount of reserves banks must hold, for example -- at the start of 2010. The fear is that this could impede the stubbornly weak global recovery and curb spending in one of the few nations with a surplus of savings -- at the expense of countries like Australia. That nation’s robust exports to commodities-hungry China is a chief reason the RBA could raise rates three times in a row in late 2009.