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Yellen, Summers Say Central Banks No Match for Savings Glut

Rich Miller
·5 min read

(Bloomberg) -- The world is awash with too much savings and central banks don’t have the tools on their own to combat the economic stagnation that’s a result.

That was one of the conclusions of a high-powered panel at the Bloomberg New Economy Forum on Monday that included former Federal Reserve Chair Janet Yellen and ex-U.S. Treasury Secretary Lawrence Summers.

The session -- in which former central bankers Mervyn King and Raghuram Rajan also took part -- highlighted the limits of central bank powers in addressing such issues as climate change and income inequality. It also included pleas for a global strategy to help emerging-market and poorer countries cope with the fallout from the coronavirus pandemic.

“There is a glut of savings and a shortage of investment,” which is the core problem facing developed countries’ economies, said Yellen, who is reported to be in the running to be Treasury secretary in the administration of President-elect Joseph Biden. “We have to have fiscal policy, structural policy other than just relying on central banks to achieve healthy growth.”

While the Fed’s recent adoption of a flexible average inflation target would give it some extra leeway to aid the economy and avoid damaging disinflation, Yellen said the shift “is not a game changer from the point of view of secular stagnation.”

“At this point, they’re doing about all they can do,” Yellen said of the Fed.

Besides pushing short-term interest rates down effectively to zero, the U.S. central bank has purchased trillions of dollars of Treasury and mortgage-backed debt and set up nine special lending facilities to provide liquidity to various parts of the financial markets and the economy.

Yellen, who is now at the Brookings Institution in Washington, was tight-lipped when asked to comment on reports that she’s under consideration for Treasury secretary. “I don’t have anything for you on that, I’m sorry,” she said.

Secular Stagnation

Summers first put forward his thesis on secular stagnation in 2013. It posits that the world economy is stuck in a state where desired savings are bigger than investment and where interest rates are depressed as a result -- in some cases below zero. That severely limits the ability of monetary policy to deliver vigorous growth and on-target inflation.

Summers said central banks will likely have to keep interest rates at very low levels for the “foreseeable future” to aid their economies. But that won’t be enough on its own to tackle the “fundamental problem” facing the world economy: absorbing the excess savings in a way that promotes economic growth, and not asset bubbles, the Harvard University professor said.

While fiscal policy will have to play a greater role than in the past, that “doesn’t necessarily mean an explosion of debt,” said Summers, who’s a paid contributor to Bloomberg Television.

King, a former Bank of England governor, said expansionary fiscal policy alone wasn’t the answer simply because interest rates are low.

“It’s much, much wider than that to deal with this problem of excess saving in the world as a whole,” he said, noting that some countries have high savings while others have low levels.

New Generation

King said he was worried that the “new generation” of central bank leaders were getting into areas that aren’t core to their mandates.

“If we’re going to do stress tests on climate change, we need to do stress tests for the next pandemic. There are many ways that the financial system is threatened other than climate change,” King said.

Summers accused central banks of being “excessively focused with their domestic politics” and so inclined to talk about the environment and other issues outside their remit.

He was also critical of what he sees as the absence of a global strategy to tackle the fallout from the pandemic. “There has been no boldness at the global level comparable to the boldness at the national level,” he said. “That could get us in real trouble down the road.”

Former Indian central banker Rajan said there was a lot of stress built up in emerging-market and poorer nations as a result of the pandemic and that will have to be dealt with in the future.

Leadership Void

“There really is no global leadership right now,” said Rajan, who is a professor at the University of Chicago. “Hopefully it will emerge,” he added in apparent reference to the incoming Biden administration.

While Yellen shied away from commenting on her qualifications to be Treasury secretary in a Biden administration, Rajan was not so reticent. “She would be a great Treasury secretary,” he said.

She’d better be, if the scale of the problems laid out by Monday’s panel is anything to go by.

The New Economy Forum is an annual gathering of leaders in business, government, energy and trade to discuss some of the world’s most intractable challenges. The coronavirus pandemic and the impact it has wrought on the global economy is a centerpiece of those talks this year.

The four-day forum is organized by Bloomberg Media Group, a division of Bloomberg LP, the parent company of Bloomberg News.

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