Episode 19: Pow! Pow! El-Erian Talks Central Bank Ammunition

Tracy Alloway (0:05)

Welcome to Odd Lots, I'm Tracy Alloway. Joe Weisenthal is away today, but don't worry, because I have with me here a very able and capable replacement co-host. It is, of course, Dan Moss. He's executive editor of Economics for Bloomberg News, and he's also the co-host of another Bloomberg podcast, Benchmark. Dan, thanks for being here.

Dan Moss (0:27)

It's really great to be here.

Tracy Alloway (0:28)

All right, so Dan and I have a treat for our listeners today. We have with us here in the studio, Mohamed El-Erian, he's a Bloomberg View columnist, he's chair of President Obama's Global Development Council, he's chief economic advisor at Allianz, and he's also a prolific writer.

I'm pretty sure he writes more than full-time journalists, which is pretty amazing.

Dan Moss (0:50)

Well, some of us anyway.

Tracy Alloway (0:51)

That's right. And he also has a new book out, which feeds directly into what we're actually going to talk about today.

Dan Moss (0:58)

That's right. Today, we're going to be talking about Central Banks and the extraordinary influence they've wielded, not just on markets, but on the economic life of nations since the financial crisis.

The secondary question is whether they are running out of ammunition, whether their influence is diminishing, or, as a colleague of ours has put it, whether they've become impotent.

Tracy Alloway (1:21)

And on that note, it's a really good time to talk about it, because just last week, we had the European Central Bank announce a whole raft of new stimulus measures. And we didn't necessarily see the market reaction we might have expected. So this question... Oh, Dan's disagreeing with me.

Dan Moss (1:38)

The initial market reaction was quite powerful, because they front-loaded a lot of the announcement. Typically, the ECB goes for the rate announcement, and then anything on QE or special ops has had to wait for Draghi's press conference. They went out of the gate at 7.45 New York time and out of the gate strong.

I think, Tracy, markets retraced that initial move because they heard something else from him, which is that interest rates won't go much lower. And they appeared to listen.

Tracy Alloway (2:08)

All right, we are going to talk so much more about that. But before we do, I want to set the scene a little bit. I want to go back in time to the deep dark days of 2008, early 2009 Lehman Brothers had just collapsed.

Money markets were disintegrating. There was a banking crisis. Asset prices were falling.

And basically, it looked like the world was kind of falling apart. But then came the central banks. And suddenly, everything was slightly better.

Dan Moss (2:37)

And things were pretty good for a while. The economy didn't double dip, as some people had warned it would, though there were occasional bouts of volatility. But then the narrative started to change around the turn of this year, more than seven years after the financial crisis.

Economic growth still hadn't picked up significantly, despite multiple expansionary programs, multiple steps of stimulus, trillions of dollars worth of asset purchases. People started talking about this idea, and Draghi confronted this directly, that they'd run out of ammunition, worrying that they wouldn't be able to keep markets happy forever.

Tracy Alloway (3:16)

Let's hear what Mario Draghi actually had to say about that ammunition question last week.

Mario Draghi (3:21)

Well, I think the best answer to this is being given by our decisions today.

It's a fairly long list of measures, and each one of them is very significant and devised to have the maximum impact into boosting the economy and the return to price stability. So we have shown that we are not short of ammunitions.

Tracy Alloway (3:48)

On the table for today's discussion is basically a market's crisis of faith, let's call it, in central banks.

And Mohamed, you're actually perfectly placed to discuss this topic because you've just written a book, and your book is called The Only Game in Town, The Only Game Being Those Central Banks. How did you come up with that topic?

Mohamed El-Erian (4:09)

So it came from a central banker. I was at a conference in November of 2014 organized by the Central Bank of France, the Banque de France, and the outgoing governor, Christian Noyer, opened it.

And it was attended by lots and lots of central bankers around the world. And I was sitting there, and he basically defined the conference in the following term. He said, we have become the only game in town, and we don't like it.

The title comes from him, because it really speaks to the fact that central banks have been forced, they haven't chosen to, they have been forced to take on more and more responsibility, knowing really well that their instruments are badly suited for the responsibilities they've taken on. But they have felt that they had no choice to do it, and increasingly, they became the only game in town, and their success has become a function of somebody else. And that's a very uncomfortable position to be in, and that's why the governor said, we don't like it.