Going beyond the central bank "put"

The moral hazard created by the “Bernanke Put” and the Troubled Asset Relief Program or TARP in 2008 is still exerting a malign influence over global markets in 2019. In 2008, the Federal Reserve and the US treasury department took desperate measures to stem the rot as the full dimensions of the subprime crisis became apparent.

The Fed expanded its balance sheet, pumping money into the global system by buying bonds.  TARP focused on cleaning up toxic assets. Other central banks followed in the wake of the Fed with rate cuts, quantitative easing (QE) and other liquidity-enhancing measures. Governments deployed counter cyclical policies. India, for example, vastly increased public spending. Similar measures were adopted and continued after the financial crisis of 2011-12.

The moral hazard lies in the fact that traders now expect similar measures every time there is a growth blip, or some problem affecting the global economy. This encourages risk taking behaviour, predicated on the assumption that there will be bailouts if something goes wrong.  Donald Trump’s tweetstorms exhorting the Fed to cut rates, reinforces the assumption that a “put" is in place.  

It's hard to make a definitive assessment of the policy action after the subprime crash. It wasn't completely successful. The global economy didn't recover totally and hasn't ever registered the robust growth rates of 2005 since.  Indeed QE continues in Japan and both European Union and Japan have negative rates. But on the other hand, things could surely have gotten a lot worse without the bailouts.

Another troubling issue is that the slowdown of 2019 isn't due to a financial crisis, as in 2008, or 2011. It's been triggered by geopolitics. The US-China trade war is directly responsible for a large proportion of the slowdown. 

Brexit has not yet happened but it has already caused issues. The UK is a large economy. Brexit will impact the entire Eurozone and cause some uncertainty across the rest of the world.  In addition, there are simmering tensions involving Iran, Syria, Venezuela, and potential flashpoints for conflict in the subcontinent and on the Korean Peninsula. There is also Hong Kong.
 

Contrast this with 2008. There was a full blown financial crisis then. But trade barriers were lower. The Eurozone didn’t look like crumbing as a political entity. The US-Iran equation was less fraught. Venezuela and Syria were going concerns.

More or less coordinated central bank action coupled to counter-cyclical government policies worked, at least to contain that crisis.  Right now, it's a moot point if either central banks or governments can coordinate policies. Indeed if Mr. Trump’s utterances are to be taken seriously, adversarial relationships with the US taking on the rest of the World appears more likely than coordination.  

As of now, the free trade of goods is impeded. It will take time for manufacturers to rework supply chains to reduce China dependencies. There are no guarantees that Mr Trump would not then raise tariffs on say, Vietnam or Bangladesh, or wherever manufacturers move.

There are also serious impediments to free labour movement.  Brexit is one example. The rest of the Eurozone is also seeing an upsurge of nationalism, which could result in problems for movements within that bloc. The US has tightened visa requirements, significantly raising costs for IT service providers.  At the lower end of the services market, tighter checks on potentially illegal immigrants has also started to hurt American service industries.

Unlike in 2008, monetary loosening will not address these concerns.  In essence, we are seeing the rollback of three decades of globalization—a period when goods and, to a lesser extent, people, moved with increasing freedom across the world.  

This current situation can only be addressed by governments talking to each other and agreeing to loosen newly-erected barriers.  Looser monetary policy might spark off a strange situation, where capital flies across borders but goods and people face barriers. In that event, we're likely to see asset inflation. But growth won't accelerate meaningfully, until and unless the real geopolitical issues causing this slowdown are addressed.