CENTRAL BANKS TELL MARKETS: FLY BLIND

FOR the first 70 years of the automobile, cars had no seatbelts.

- SHANKKAR AIYAR

Nash Motors offered lap belts in 1949 but buyers rejected it, and governments looked away till it was made mandatory in the US in 1968.

The logic was, “We always managed without it.” That logic was never defeated by argument. It was defeated by the body count.

The saga merits attention. This week, the world’s most powerful central bankers gathered at the ECB Forum at Sintra in Portugal. Forward guidance—signalling the path of interest rates—was given a joint burial by the central banks of the US, Europe, Britain and Canada. ECB’s Christine Lagarde even offered the eulogy regretting she felt “bound and compelled” by it. Kevin Warsh, the new Fed chair, declared “common cause” with his mantra: no forward guidance. India’s RBI, notably, has not yet boarded the silence wagon—suffice to say silence is not an indulgence developing economies can afford.

Alan Greenspan practised ambiguous transparency. Sintra has proclaimed it. The timing is an indictment. Earlier this week, a Bank for International Settlements report named the AI investment boom a threat to financial stability. It warns that repricing caused by higher rates or an AI bust could be as disruptive as the crisis of 2008. Paradoxically, researchers warn of a crisis-scale correction; the principals respond by switching off the lights.