Draghi will be remembered for saving the Eurozone project when he declared that the ECB would do “whatever it takes to save the Euro”. His legacy is also the move to negative interest rates, where investors pay governments to loan money to them. ‘Super Mario’ as he has become known epitomises the last 10 years where central banks have been at the forefront of the policy response to the financial crisis.
However, when Mohammed El-Erian wrote ‘The Only Game in Town’ in 2016 he believed that central bank policy had done as much as it could. It was time for politicians to take the lead in driving economic growth. He envisaged the world as approaching a T-junction; one road leading to higher inclusive growth, stability and a calmer politics, the other to recession, volatility and messier politics. It appears that in the few years since the book was published not much has changed.
The book is an excellent account of how the global economy emerged from the financial crisis, and the important role that central banks played. It is aimed at the layman and not economists and so it clearly and engagingly explains what otherwise could be a rather dry topic. El-Erian also looks at the impact that this over-reliance on monetary policy is having: the sharp rise in equality, the breakdown of global co-operation, our falling trust in institutions and a financial system with shaky foundations. His argument is not that central banks caused these issues, but the lack of policy response from the world’s politicians has. Draghi at his press conference urged politicians to use fiscal policy to further stimulate the Eurozone economy and avoid a recession
Undoubtedly Draghi’s words were directed towards Germany, which has benefitted hugely from the ultra-low interest rates set by the European Central Bank to help other highly indebted countries in the EU, and despite its large budget surplus refuses to increase its fiscal spend to boost growth. Rather depressingly El-Erian highlighted this issue in 2016. It is a good example of the prescience on display in ‘The Only Game in Town’, but sadly also of how little has fundamentally changed in the intervening years.
The book drifts a little when El-Erian starts to propose how we ensure we ‘take the right turn at the T-junction’. His suggestion is a reassuring one of the need for flexibility and compromise, not only from politicians, but society as a whole. To do this he highlights the need to be aware of our own ingrained biases and the benefits of diverse viewpoints. However, when listening to the contributions of those on both sides of the Brexit argument, the possibility of that seems very far away.
‘The Only Game in Town’ is an excellent and accessible entry point into the recent history of monetary policy. But the real reason to read it is to understand the effects that central banks have had over the last 10 years, particularly on our politics, and why we should all hope that we move towards a world where their influence is less required.
The JM Finn Investment Book Club was convened in the hope that, month by month, some of the wisdom of investing gurus such as Warren Buffet, Charlie Munger, and Mohnish Pabrai might rub off on the participants eager selves.