Understanding the new normal: A review of the only game in town by Mohamed A. El-Erian.

AuthorMelesh, Zoryana
PositionBook review

"It soon became obvious to me that I was not the only one feeling anxious in the room in Paris. Many of us [were] inherently uncomfortable about where central banks had been forced to operate [and] what might lie ahead." (1) Described as a rather unpleasant November day in Paris, Mohamed A. El-Erian along with several central bank governors attended a symposium entitled "Central Banking: The Way Forward?" by the Bank of France. Acknowledging that central banks have been considered the only game in town or the key player in maintaining economic stability post-crisis, France's central bank governor, Christian Noyer, expressed concern about such mounting pressure.

In The Only Game in Town, El-Erian details the causes, damages, and the way forward for the failed romance between governments and finance. In setting the stage, he describes what was--governments paying interest income on holding their bonds, the banks competing for your deposits, and central banks being celebrated--to what is--both governments and banks charging customers interest for providing them with liquidity while central banks are subject to greater scrutiny.

The current global economy, El-Erian argues, is at a pivotal juncture, heading towards a fork in the road that offers two choices. First, a path towards job creation, inclusive growth, reduced financial instability, and reduced inequality. Second, a path that promises lower economic growth, higher unemployment, and financial instability, which in turn can and may foment political instability and erode social cohesion.

No progress can be achieved, however, without both the politicians and the central banks; while the former have not enjoyed a good track record in recent years, as is evident by the recent rise in populism, El-Erian praises the latter for their ability to prevent a multiyear depression. However, the central banks' power is waning--the tools at their disposal are limited. Yet, central banks have adopted policies that, while providing stability in the present, might cause instability and erode their credibility and autonomy in the future. Namely, banks have forcefully repressed volatility, boosted asset prices, and influenced capital allocation--measures that have made them vulnerable to the accusation that they have engaged in quasi-fiscal activities without a mandate to do so.

Many hawkish central bankers have expressed concern that their boundaries have been expanded into the fiscal domain, beyond their...

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