Great Recession Caused By Reckless Extreme Low Interest Rate Policy Pursued By Western Central Banks

A Little Acknowledged Failure Of Western Central Banks

Sure it was not the only cause of the Great Recession, but a major one. To this day it has been little acknowledged by neither western central bankers nor western economists. On the contrary this reckless, extreme low interest rate policy still continues. This is another prominent example of colossal government failure.

Western Central Banks Learned Nothing From Japan

Twice within a decade the Fed followed by other Western central banks have lowered and kept short term interest rates at ridiculous low level for way too long. As if our Western central bankers did not learn the lessons from Japan. Western central bankers were obsessed with using low short term interest rates to stimulate economic growth and they defended their reckless policy arguing they were trying to avoid imaginary deflation and inflation was not a concern.

In addition, the Fed and other western central banks in the wake of the Great Recession also massively inflated their balance sheets and purchased government bonds.

Western Central Bankers Ignorant Of The Price Of Money

Hundreds of highly trained and well compensated economists work on the staff of Western central banks. However, it seems that the whole profession of Western economists ignored that the interest rate is foremost the price of money. Thus, Western central banks used their price control power to artificially and extremely lower this crucial economic price.

More surprisingly, it did not even bother Western central banks or economists that real interest rates turned negative making money incredibly cheap.

A Blunder Of Enormous Proportions

Any halfway knowledgeable economist knows that when you manipulate a crucial economic price against common sense negative consequences will follow. And they did.

Thus, Western central banks are to a considerable extent responsible for fueling the exuberant speculation on the housing markets, commodity markets, derivative financial instruments etc. in the Western countries; for the irresponsible, massive and cheap debt financing by politicians at every level in Western countries; and for making savings in money markets and government bonds unattractive. Investors in life insurance, pension funds etc. have been suffering.

Now Western Central Banks Are In A Self-Made Trap

In the wake of the Great Recession, Western central banks again resorted to keeping short term interest rates extremely low. Thereby, they ignored the long known Liquidity Trap.

Even worse, Western central bankers cannot raise interest rates at all or not very fast without jeopardizing the dire situation of Western government deficits and debt, because of the immediate impact on net interest payments of government budgets.

Western Monetary Policy Is In Urgent Need Of Reform

In light of the Great Recession and the colossal failure of Western central banks a major debate followed by reform is inevitable. The earlier, the better.

A Simple Monetary Rule For Central Bank Controlled Interest Rates

One solution that comes immediately to mind is that central banks should not be allowed to lower interest rates below the economic growth plus inflation rate.

Privatization Of Money

A return to a gold standard or commodity currency is most likely a nostalgic wish. Privatization of money, on the other hand, should be given serious consideration. There is a reason why in particular western governments still hold on to their monopoly of money or their power to create money.