Publisher: Agate

ISBN: 978-1-57284-306-6

If you follow the dailyfinancial news, no doubt you have presumably heard of references to“the Fed” in the USA or central banks, reserve banks, andmonetary authorities in other countries.

What are theseinstitutions? How do they operate? Why did they play an essentialpart in putting out the economic fires such as the the Great Recession during the 2000s, and the recentpandemic? 

Essentially, theseentities manage the currency and monetary policy of a country. Theyhave repeatedly played an important role in private sectordevelopments, public finances, and government policies. They areknown as the lender of last resort.

Financial institutionsthat cannot get the funding for their daily business turn to thesecentral banks. They are accorded the task of providing financialmarkets’ smooth operation and stability. 

Johan Van Overtveldt,author of The Mystic Hand: How Central Banks Shaped the 21stCentury Global Economy, points out that: “since the 2007-2009global financial crisis, central bankers have become the pivotalplayers par excellence in economic and financial matters,  and their immediate bold actions that they have takenin response to the COVID-19 pandemic have further expanded theirdomination.”

Their hand, so to speak,is felt everywhere, more so often than ever before in human history.And that hand is surrounded by a lot of mystique. It is this mystiquethat constitutes the central theme of the text. 

Van Overtveldt served asthe Belgian Minister of Finance before joining the EuropeanParliament and becoming Chairman of the Budget Committee. He focuseson financial and monetary matters across the European Union.

Noticeable about this bookis Van Overtveldt commences at the most basic level and assumes hisreaders have bare or no previous familiarity of the workings of thesecentral banks. Throughout the tome's six chapter, he examines TheGreat Depression, the 2007-2009 global financial crisis, thetimeline of the financial crisis, the immediate aftermath of the2007-2009 global financial crisis, and an examination of theunintended and primarily negative repercussions of the exceptionallyunorthodox monetary toolbox, and ending with the policy framework ofcentral banks. 

As he specifiesthroughout, since 2008, these central bankers have been doing thingsthey have never done before, with a magnitude that’s built up overwhat’s turning into a rather lengthy period.

They may have actedcreatively to escape serious disasters, but it is a double-edgedsword. The impact of these practices on economic growth tends toweaken as time moves on, which leads to the pitfalls of increasinginequality. So too is the effect of unusual monetary policies onasset prices, such as housing prices and bond prices. We have amonstrous debt accumulation, bubbles, and political stagnation, whereeconomics becomes thwarted by political decisions. And politiciansare more engrossed in the next election and prefer increasingspending than cutting it.

As Van Overtveldtconcludes: “Which of these two sides dominates the distributionaleffects of unconventional monetary policies? There’s nostraightforward answer to this question.” When you attentivelyscrutinize these strategies, you can quote the old saying, “bedamned if you do and damned if you don’t.” 

When asked what made himfeel this was the time to address central banks, Van Overtveldtreplied: “The Great Financial Crisis of 2007–2009 turned centralbankers into the only game in town when it came to policies aimed atending the crisis. The COVID-19 pandemic has only reinforced thisunique position of central bankers.” 

In the Epilogue, VanOvertveldt leaves his readers with the sobering conclusion thatindeed the Central banks were able to snuff out the fires duringpreceding economic debacles. Nonetheless, maintaining theseunorthodox monetary policies will continue to lead to periods ofturmoil, disorder, and paralyzing uncertainty will occur withescalating regularity. Crises will become more severe, and the roomto satisfactorily react in terms of policy simply won’t be there.Not a very encouraging picture of the future!