Central bank activism did not stop with their success in normalizing utterly dysfunctional markets and calming a financial crisis that had brought the global economy to a virtual standstill. Having succeeded, they then found no one to hand off to for the next stage of the economic recovery. As such, they felt that they had no choice but to take on unprecedentedly large responsibilities for the macroeconomy. This was not a power grab. Nor was it something that central banks were seeking. Instead, with political dysfunction paralyzing other policymakers with better policy tools, central banks felt a moral and ethical obligation to do whatever they could to buy time for the private sector to heal and for the political system to get its act together and assume its economic governance responsibilities.
In this new role, central banks did more than assume a leadership role. They also supplied almost the entire content of the policy response, and did so with inherently partial and blunt measures. Being the only game in town, central banks found themselves pushed ever deeper in experimental policy terrain, and they have stayed there much longer than anyone anticipated or may have hoped for initially. Policy making often entails difficult trade-offs. This phase of modern central banking has been no different, though with one major qualification: This time around, central banks have not been able to resort to reliable insights and information from historical precedents, analytical models, or past policy experience. There are none that can guide them properly and inspire well-placed confidence.
On the positive side, the central banks’ unconventional measures did manage to buy considerable time and space for others to get their act together. They facilitated major private sector balance sheet repair, starting with banks and then corporations and households. They contributed to growth, albeit frustratingly tepid, and, in the case of the United States, to significant job creation. Like dedicated engineers, central banks constructed the best bridge possible with the limited materials they possessed. But no matter how long a bridge they have built, the right destination was never theirs to deliver on their own.