Central banks - crisis creators

[marmar]

from Asia Times:



Central banks - crisis creators
By Hossein Askari and Noureddine Krichene


There is arguably no greater danger to financial and economic stability than a central bank pushing cheap monetary policy - by forcing interest rates to low levels with negative real interest rates, and unlimited liquidity onto the banking system. Loose monetary policy pushes credit, inflates asset and commodity prices, and leaves bankruptcies and economic and financial chaos in its wake. This is essentially the path taken by the US Federal Reserve since 2001, the most hazardous monetary policy since its creation in 1913.

It has given lessons in building and re-building bubbles. The Fed has set interest rates to near-zero bound, put no limit on expanding its balance sheet, and changed its procedures by purchasing long-term risky assets, such as mortgage-backed securities and consumer-loan-backed securities that other major central banks, such as the European Central Bank, have so far resisted.

The Fed admonishes commercial banks for taking excessive risk, yet it does so itself with impunity. Risk does not appear to be an overriding issue for the Fed as it adopts whatever is needed to achieve full employment. Success seems to be measured by the rate of economic growth and employment and not by the safety of the banking system and financial stability. Failed banks are simply bailed out by the government printing press.

Those who question Fed policies have met with criticism from eminent policymakers. For instance James Bullard, president of the St Louis Fed, has deep concerns about auditing Fed operations because it would interfere with the Fed's independence. The Barack Obama administration has blocked legislation to audit Fed operations. In reality, the concept of Fed independence is quite vague; there is no truly independent central bank anywhere and the Fed has not been independent from government policy. By rejecting legislation that audits its operations, the Fed has shown that it is not an independent institution. If the Fed rejects oversight legislation, then why force private banks into oversight?

Ever since Henry Thornton, the British abolitionist, banker, economist and philanthropist, published his book in 1802 on paper credit, it has become widely acknowledged that monetary expansion by a central bank leads to an economic boom, over-expansion of credit via the credit multiplier, and inflation, invariably followed by financial crises and bankruptcies. .........(more)

The complete piece is at: http://www.atimes.com/atimes/Global_Economy/LE27Dj04.html