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.
