In the absence of such anchors for financial markets, the differences between plausible narratives about the future is simply too big to form a definite view and investors are thus held hostage to even the smallest rumors, leading to the current bout of volatility in asset prices.
In a speech at the Professor Lamfalussy Commemorative Conference in Budapest, Luis Awazu Pereira da Silva of the BIS questioned how investors' faith in the future could be re-anchored now that a 21st century version of the Great Depression has been avoided but yet the world economy appears to be stuck in a "new mediocre" of low growth amidst a gloomy and volatile environment.
"As we are beginning to see, one answer could be to signal a roadmap towards a gradual normalization of monetary and financial conditions," da Silva said, a reference to the U.S. Federal Reserve's move in December to raise rates above the near-zero level held for the last seven years.
But normalizing monetary policy is far from enough and has to be accompanied by reforms in the real economy that address disagreements in society over how to allocate resources now and among future generations in a move to establish new social contracts.
The global financial crises has given economists and policymakers new insights into financial cycles, systemic risk and financial exuberance, and how vulnerabilities can build-up through debt flows in international currencies.
But the global economic recovery remains weaker than expected given the massive stimuli used, and still being used, and the current state of financial markets may tempt policymakers to increase stimulus and expand asset purchase programs, da Silva said.
"But are we going to continue recreating large financial cycles, just another boom with an over-priced asset of some sort?," he asked.
Instead, policymakers should focus on fostering more sustainable growth through productivity, with technology components of a new business cycle already apparent in daily life, such as faster communications, new internet-based services, new exchange rules and new technologies for lower carbon-based growth.
It is clearly not the role of central banks to foster such structural changes in society, but "neither should be their role to sustain credit boom-and-bust cycles that always end badly even if now we know much better how to manage them," da Silva said.
Economists and central banks may be able to help encourage such reforms by re-anchoring financial markets' view of the future through narratives that help reduce uncertainty by supporting more pro-active policies towards growth and structural reform.
That said, financial markets require more than just a vision, da Silva said, adding that tangible action is needed. Some of this is happening with the U.S. monetary policy normalization and in other countries where growth models are being redefined along with social contracts.
"At the end, confidence will return in a durable way only when agents perceive that we have passed the "bottom" of the GFC" (global financial crises) and investors start to feel that the upside in asset prices is more than just the result of ad hoc temporary exceptional stimuli for exceptional times.
To read da Silva's speech, click here.