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Central Banks Worry About Engaging World Markets After ‘Brexit’

The Madrid Stock Exchange on Friday, which reported steep sell-offs after Britain voted Thursday to leave the European Union.Credit...Andrea Comas/Reuters

As global markets reel after an establishment-rattling vote by Britain to sever ties with Europe, investors are again expecting central banks to ride to the rescue.

And that may be the problem.

Or so believe a number of investors and economists who worry that another round of central bank intervention in the markets will compound the sense of alienation, frustration and anger at global elites that encouraged a majority of Britons to opt for leaving the European Union.

Traditionally, market participants have tended to cheer central bank activism.

In times of financial panic, wholesale bond buying, negative interest rates and disbursing cash directly to consumers (the yet-to-be-deployed weapon in the central banker’s armory) have been seen as easy policy substitutes for governments unwilling or incapable of taking action themselves.

But, as the world’s leading central bankers finished a weekend of brainstorming in Basel, Switzerland, as to what their next move might be, some feared that this time around they might do more harm than good.

“People say that central bankers have not done enough, but they have done too much already,” said Stephen Jen, a former official at the International Monetary Fund who now manages a hedge fund in London.

Global central bankers had already planned to convene at the annual meeting of the Bank for International Settlements, a clearinghouse and research shop that provides a private forum for central bankers to gather and exchange views.

But the British referendum results and the sharp fall in the markets that followed brought an extra urgency to the two-day meeting.

On Saturday, Agustín Carstens, the head of Mexico’s central bank and chairman of the bank’s policy group that monitors the global financial system, said that committee members had “endorsed the contingency measures put in place by the Bank of England and emphasized the preparedness of central banks to support the proper functioning of financial markets.”

Adding to global political tensions were parliamentary elections on Sunday in Spain, where the anti-austerity left-wing party Podemos was expected to continue its recent run of electoral success.

While the sell-off in stocks on Friday was very sharp, market participants said over the weekend that they were heartened that major market makers were able to absorb the selling fairly well.

Playing a central role were exchange-traded funds, which at one point on Friday accounted for close to 50 percent of overall trading volume in stocks. That is an extraordinary statistic, given that the funds were largely unknown a decade ago as an investment option for investors.

The ability for investors to quickly and successfully buy and sell stocks and bonds, the crucial advantage that exchange-traded funds have over mutual funds, is seen by regulators as critical in times of acute financial stress.

Part of the conundrum for central bankers is that the recent sell-off is not the result of an event like Lehman Brothers going bankrupt in September 2008, which provided authorities with an unassailable excuse to intervene. Lehman’s failure caused markets to seize up and financial institutions to stop dealing with each other.

But when the crises that rock global finance are social and political, it becomes more awkward for central bankers to defend any form of extraordinary intervention.

And that is what worries analysts, who for some time now have been concerned that interventions by central banks were distorting markets by making them less liquid and creating anomalies such as what currently exists in Japan.

There, the nation’s central bank owns 34 percent of the country’s government bonds and is one of the top 10 shareholders in 90 percent of the companies listed on the stock exchange, according to data from Bloomberg.

“Central banks have done everything to jury-rig markets,” said Julian Brigden of Macro Intelligence 2 Partners, an independent research company based in Vail, Colo., that advises large money management firms on global investment themes. “What makes you think they won’t want to do more?”

Mr. Jen, the hedge fund manager, scoffed at the notion that the extraordinary central bank interventions of recent years were designed to stamp out deflationary threats and spark an increase in prices and economic activity in stagnant economies in Europe and Japan.

“We have plenty of inflation, it’s just asset price inflation,” he argued, referring to elevated equity, bond and housing markets that have been one consequence of these policies. “People can’t live in cities anymore, and they are grumpy about their jobs.”

In Britain, this dynamic has been particularly acute. Thanks to aggressive central bank policies, house prices in London are among the most expensive in the world, yet the inflation-adjusted weekly average wage of 470 pounds, or about $632, is still £20 lower than it was before the financial crisis, according to the Resolution Foundation, a British research organization.

Interestingly, one of the most vocal critics of central bank overreach has been the Bank for International Settlements itself.

For years now, two senior economists at its research arm, Claudio Borio and Hyun Song Shin, have been arguing via speeches and papers that artificially low interest rates have created pernicious asset bubbles in equity and housing markets in the developed world and debt frenzies in emerging markets like China and Brazil.

These views were highlighted again on Sunday in Basel with the presentation of the bank’s annual report.

In a speech, Jaime Caruana, the bank’s managing director, said that extremely low interest rates were a threat to global financial stability as they “depress risk premia and stretch asset valuations.”

The result, Mr. Caruana contended, was the threat of a “loss of confidence in policy making” and “unrealistic expectations about growth and the ability of present policies to lift global growth.”

While couched in platitudes, Mr. Caruana’s message was clear enough. Persistent central bank interventions have not only created dangerous distortions, they have added to a sense of worldwide cynicism that these measures have not accomplished their central aims: lifting economic growth and increasing wages.

It is worth noting that Mr. Caruana is familiar with asset bubbles: He was the head of Spain’s central bank a decade ago when reckless lending among the country’s financial institutions resulted in a boom and eventual bust of Spanish property prices.

But, Mr. Brigden said, central bankers will have a harder time justifying an intervention when the markets are going haywire because of an election upset somewhere.

Of course, bashing central bankers is always a popular and easy pastime for politicians, economists and investors alike.

It is also true that central bankers in Britain, Europe, Japan and the United States have consistently said that their actions have been forced by the unwillingness of politicians and governments to act themselves.

“Monetary policy cannot do it alone,” said Daniel C. Dektar, a bond investor at Amundi Smith Breeden, a global asset manager. “People have been left behind, which is creating anti-establishment sentiment in just about every democracy in the world. You would think that at some point governments would get the message.”

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Central Banks Wary of Engaging World Markets After ‘Brexit’. Order Reprints | Today’s Paper | Subscribe

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