Macroscope | Can central banks really prevent a repeat of the Great Depression?
As we wrestle with challenges similar to those before the 1920s slump, let’s not rely on central bankers to save us from economic calamity
The world economy is facing pressures similar to the 1920s, European Central Bank president Christine Lagarde warned in a recent speech at the International Monetary Fund in Washington. Her remarks are at odds with the current narrative of a soft landing for the global economy.
Lagarde, a former IMF managing director and former finance minister of France, is widely respected for her extensive experience and incisive intellect, so it would be foolish to disregard her warnings.
While drawing parallels with the 1920s, such as the recent resurgence of “economic nationalism” and protectionism, which a century ago helped produce a stock market crash and the Great Depression, Lagarde also noted the essential differences.
One such difference is that central banks, including the ECB and the US Federal Reserve, have more sophisticated tools today for fighting recession than in the 1920s when an attempted reversion to a gold standard produced disastrous results.
But the unquestioning faith markets put in the ability of central banks to steer the global economy from a period of high inflation and high interest rates to revived growth and stability amid gathering storms is naive and risky.
As Lagarde and current IMF managing director Kristalina Georgieva – who moderated Lagarde’s Michel Camdessus Central Banking Lecture in Washington last week – both noted, complacency about prospects for a soft landing could be the enemy now.
