Another Troika: Central Banks, Governments, and Markets Complicate Global Growth

Markets, governments, and central banks are all enveloped in a convoluted dance, which has so far failed to result in the global growth that the three economic catalysts have set out to achieve. Markets hang on to the words of the world’s economic czars, namely, central bankers.

The guidance of Mark Carney, the inventive policy from Europe’s Mario Draghi, and the ever ambiguous remarks from U.S. Fed Chairman Ben Bernanke, all have markets sitting proper, like a dog waiting for a treat. Yet central banks are running out of treats to give, as the ones remaining are only so lucrative. Instead, central banks are looking to governments to craft the policy that will make their gifts to the markets all the more potent.

Then there are the governments who are overwhelmed with gridlock, ideological divide, and ineffectiveness. These ruling bodies have pushed countries like Greece, Portugal, and to some extent, the U.S. (via the budget sequestration), to extremes. Governments are then forced to blame markets, or hope that central bankers can bail them out of a sticky situation.

European Central Bank President Mario Draghi has worked hard to maintain the unity of the European Union, at a time when austerity fatigue, bailout weariness, and a general lack of positive news has tested the world’s largest economic union. Last year, he pledged famously to do “whatever it takes” to maintain the euro zone, as failing banks and weak regional economies pushed interest rates beyond what was feasible, most notably in Spain, where rates for investors reached a euro-high of 7.75 percent.

However, the creation of the Outright Monetary Transactions fund soothed markets and helped drive rates down, knowing that Draghi could act to scoop up bonds and drive down rates if need be. As his policies and record low borrowing rates at least cooled the previously roiled continent, private sector lending to build proud Europe back up was supposed to follow. It has not.

Periphery countries continue to pose tangible risks to banks dealing with their own problems. Capital rules being put on banks from monetary policymakers across the globe has banks scrambling to cope, and has created a public disagreement between some in the United Kingdom. Moreover, the International Monetary Fund has asked Spanish banks to make investors bear the brunt of these rules, by slashing dividends to shareholders in order to both comply with the capital requirements and pick up lending.

However, in many cases, governments are not laying the groundwork that will inspire the confidence required by the markets to unleash capital. Greece failed spectacularly to reform its overburdened public sector, and has since only done so when the threat of collapse without bailout money forced them to respond accordingly.

The capital rules have even become a question mark for Greece recently, as their budget shortfall in August must be covered in order to draw on IMF money in the coming months. It has been suggested that the recapitalization fund the government set aside for banks be used for this, but it wasn’t clear that the government could do so without overleveraging the banks.

The awkward and uncomfortable position that central banks, markets, and governments find themselves in could not come at a worse time. European unemployment continues to sit at record high levels, Greece is losing a generation of youth to economic malaise, and China will not necessarily promise to be the global bailout for growth that it has been in previous years. The impetus is now on these changers of the human condition to find ways to make that condition better, and make economies work better before there is even less time to do so.

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