‘It’s Not Our Fault’, Say Central Bankers

‘It’s Not Our Fault’, Say Central Bankers

The failures of monetary policy in the wake of the 2008 global financial crisis are manifest.

The Federal Reserve took interest rates to zero in 2008 and held them there for six years before raising them slightly in recent years.

The Fed also expanded its balance sheet through money printing, from US$800 billion to US$4.5 trillion from 2008 to 2014.

That balance sheet has only been reduced slightly.

Other central banks, including the European Central Bank (ECB) and the Bank of Japan (BoJ), used negative rates and expanded their balance sheets even more than the Fed.

Those negative rates and bloated balance sheets are still in place.

Elites blame their own policy failures

These extreme forms of monetary easing were supposed to provide ‘stimulus’ to return the economy to self-sustaining trend growth.

Nothing of the sort happened.

The economy grew, but at the slowest pace of any recovery in history.

Europe and Japan have suffered repeated recessions and periodic deflation while the US has suffered below-trend growth and disinflation.

None of the central bank policies have produced the desired results, and none of the central banks have shown any capacity to escape the low rates and money printing they created.

Since 2008, we have lived through a massive monetary experiment that has now been shown to be a massive failure.

Rather than admit their mistakes, global elites instead seek to blame legislators and policymakers for failing to stimulate further using fiscal policy.

Central bankers were disappointed at the inability of fiscal authorities to run larger deficits to stimulate the economy. Project Syndicate wrote:

Both central banks – and especially the ECB under outgoing President Mario Draghi – have stressed the importance of a timely policy handoff to more comprehensive pro-growth measures.

Yet their pleas have fallen on deaf ears. Today, neither the Fed nor the ECB is anticipating that other policymakers will take over any time soon. Instead, both are busy designing another round of stimulus that will involve even more political and policy risks.

Now they are afraid that progressive radical solutions designed to bolster the weak economy, including Modern Monetary Theory, may emerge to discredit both fiscal policy and central banking at the same time.

This is a clear-cut case of pointing fingers.

The fiscal authorities have created multitrillion-dollar deficits even without special stimulus programs.

Debt-to-GDP ratios are at the highest levels since the Second World War and high enough to slow growth independent of monetary policy.

The extreme monetary experiments of the central bankers never should have been attempted with or without fiscal policy.

We are now left to live with the consequences, including uncertainty and slow growth.

Worse yet, the central banks will be unprepared to deal with the next crisis since they never cleaned up their mess from the last one.

A central banker says don’t blame the central banks

Raghuram Rajan is one of the top global monetary elites.

He’s a professor at the University of Chicago and at various times has served as governor of the Reserve Bank of India, and in senior capacities at the IMF and Bank for International Settlements.

He’s what the top elites call ‘a safe pair of hands’, which means he can be appointed to any one of a number of top positions with no fear of him rocking the boat with heterodox views.

He recently wrote an article on the role of central banks in the economic recovery since 2009.

Guess what?

According to Rajan, the central banks have done everything right and fiscal authorities are to blame for weak growth, below-target inflation and other maladies from the weakest economic expansion in over 60 years.

Rajan is correct when he says that central banks cannot create inflation or stimulate growth.

But he runs off the rails when he says that populist politicians (such as Trump, Boris Johnson, Giuseppe Conte and Jair Bolsonaro, whom Rajan disparages) are now threatening central bank independence.

The causality is the other way around.

It is central bank incompetence that has given rise to populism. Central banks should have their powers curtailed and their independence limited.

Incompetence has a cost, and in the case of central banks that cost involves exposure of their smokescreen around failure in economic management.

Central banks are really good for one thing only: Being lenders of last resort.

All other goals should be repealed.

Better yet, maybe we should get rid of central banks entirely.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia