The two major central banks of the world demonstrated this week they are fine watching the global economy go over the cliff. Yesterday, it was the Fed. Today, it was the ECB’s turn. Their failure to act in the midst of the ongoing crisis amounts to a passive tightening of global monetary policy. This is because their inaction raises the global demand for safe assets while allowing existing ones to be destroyed. Since these safe assets effectively act as money, the central banks are worsening the excess money demand problem that underlies the global aggregate demand shortfall. This passive tightening has been going since mid-2008 and confirms that we are witnessing what Ryan Avent calls the epic failure of central banking. Future historians will not be kind to these central banks.
P.S. Michael Darda explains why the ECB’s decision today was particularly egregious.
This post originally appeared at Macro and Other Market Musings and is posted with permission.
4 Responses to “The Epic Failure of Central Banking”
Future historians will not be kind to ANY central bankers. Central banks with their money creation do not create wealth or help the economcy and society, rather they dilute hard working peoples money and incentives to produce and innovate, and slowly but steadily erode the willingness of people to save capital. People should wake up to discover the Austrian School of Economics, and see that the widespread belief in Keynesianism is just as silly as believing the naked emperor has any clothes on.
I have a excellent plan to solve the monetary problems caused by sovereign debts in Europe. Most of the central banks activity is the trade with the Government trusties. Trade with these trusties is also the main source of profit of the commercial banks and source of the inappropriate behavior of the bankers. To prevent situation, when only French or Russian stile revolution can change the political social evil the activity of these institutions causes, the best would be to let the central banks to purchase all the freely marketed government securities. If this step would cause some increase in inflation pressures, the minimum reserve rate requirement should be raised accordingly. By this step could be achieved several goals.
1.Reduce the government debts and the interest payments that burden the national budgets. (The interests paid to the central bank will be registered as Government income).
2.The banks would lose a chalk of their activities, where they without risk can make profit, which is translated later to unjustified reward to the executives and managers.
3.The Central Bank would have much better control on the credit volume. It could pour directly money in the system by printing it, and sucking it out by increasing the Reserve Rate Ratio. If this ration would reach 100%, (a very improbable scenario), to prevent nationalization of the bank deposits, the Central bank could still increase the minimum capital requirement.
4.To prevent from government to misuse of their expenditures, the government deficit should be controlled directly, by limiting it to the level of economic growth and half of the inflation.
5.The only reason to increase the deficit above the mentioned limit would be a war, and this should be financed directly by tax increase on the companies and wealthy. This would case wars very unpopular and it is also only for good.
The only problem not solved by such a change of the system is, what will do all the unemployed bankers.
Economists believing in the goodness of Central bankers is analogous to religious people's belief in God – no amount of evil in the world, no amount of bad things happening can dissuade them that God has a plan for them.
The FED, who knows all, sees all, controls all, could make heaven on Earth, but chooses not to. Why can't economists just accept that monetary heaven comes after death – than giant ongoing deficits, negative interest rates, full employment, and skittles shooting out the asses of unicorns will feed the next life's poor.
A country's definitely in trouble if its central bank is the source of the economic mess. Honestly, no need to wait for the future historians. Today's crop of clients and citizens will provide more than enough backlash.