Macroscope Perspective: Can Central Banks Avert a Repeat of the Great Depression Amid Rising Economic Nationalism?

Macroscope | Is it possible for central banks to avert a recurrence of the Great Depression?

While we grapple with problems paralleling those prior to the economic downturn of the 1920s, we should not put our faith in central bankers to shield us from financial disaster.

Global financial markets are experiencing stress comparable to that of the 1920s, cautioned Christine Lagarde, the president of the European Central Bank, in a recent address at the International Monetary Fund in Washington. Her comments contradict the prevailing belief of a gentle downturn for the world's economy.

Lagarde, who previously served as the managing director of the IMF and France's finance minister, is highly regarded for her vast expertise and sharp intelligence. Hence, it would be unwise to ignore her cautions.

In comparing the current situation to the 1920s, the recent rebirth of "economic nationalism" and protectionism, which a hundred years ago contributed to a stock market crash and the Great Depression, was highlighted by Lagarde. However, she also pointed out the crucial distinctions.

A notable distinction is that today, central banks, such as the ECB and the US Federal Reserve, are equipped with more advanced mechanisms to combat economic downturns than they were in the 1920s. During that time, an effort to return to a gold standard resulted in catastrophic outcomes.

However, the unquestioned trust that markets have in central banks' capacity to navigate the global economy from an era of elevated inflation and high interest rates towards renewed growth and stability, even as challenges accumulate, is both naive and perilous.