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Risk Management, Not Solution, Is The New Watchword

Nothing speaks louder for the conundrum facing central banks today than taking a position of risk management. The tacit admittance that they are powerless to turn the crisis around begs for a serious rethinking of the structure of the global monetary system.

Fed vice chairman Janet Yellen, says “risk-management considerations arising from today’s unusual circumstances strengthen the case for additional accommodation. It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.”

William C. Dudley, head of the Federal Reserve Bank of New York, adds that threats to economic growth in the United States are “skewed to the downside, reflecting risks posed by developments in Europe and the impending U.S. fiscal cliff.” The Fed, “operating under a risk-management paradigm may be led to undertake actions intended to provide some insurance against the emergence of especially adverse outcomes.”

Joe Gagnon, senior fellow at the Peterson Institute for International Economics in Washington, concurs. “If the risk now is a lower outcome on employment or growth, then they need to take that into account by being more stimulative than they otherwise would have been.”

In short, what we need is another Band-Aid rather than an innovative procedure to stop the hemorrhaging.

“What the Fed is worried about is that a seasonal slow patch will be converted into something worse because of the uncertainty over Europe and U.S. fiscal policy,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. “The risks are that we will be disappointed on the downside in the U.S. economy again.”

We are clearly in uncharted waters. Equally clear is the pressing need for a new approach to solving the problem. Whatever the Fed does today is irrelevant if it fails to accept that whatever has worked in the past has no bearing on what we need today.

The coming election, regardless of the victor, can bring us no closer to recovery without first accepting that managing risk is not an alternative.

We have been captive to the doldrums too long. We need a fresh wind to fill our sails and move us forward.

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