Central Bankers Protecting Us From All Bad Things

You know it’s a slow news day when you’re reduced to writing about a study from the Bank for International Settlements. Oh well, you’ve got to play the hand that you’ve been dealt.

So, anyway the BIS (the central bankers central bank) asks the pithy question of what role central banks should play in reducing the risks of future financial crises. They talk about central bankers being on the lookout for systemic risk but then take it a step further:

“This issue, which was unsettled before the crisis, is an even livelier one now,” the BIS report notes. “Do central banks need new tools for such a purpose? If so, what tools? Should central banks on occasion use their monetary policy tools — over and above what current objectives would imply — to counteract threats to financial stability? Is there a risk that at times the two mandates … would come into conflict?”

For example: Are interest rates, meant primarily as a tool for managing inflation and growth, also appropriate for maintaining financial stability? Some say central banks should pay more attention to asset-price buildups before they become bubbles, by keeping interest rates higher than traditional measures of inflation might argue.

The excerpt above comes from the WSJ Real Time Economics blog which is quoting from the BIS report. That report is a cool 200 pages and I will confess to having neither the inclination or intent of wading through it, so I’m going to presume that the WSJ account is accurate. If you do take a gander at the actual report and find it should be characterized differently, do let me know.

But onward, the Journal article goes on for a bit like this but the argument seems to be that in the future central banks may be our guardians against bad things happening. This won’t surprise you, but according to the article the European Central Bank is leaning in this direction.

Now it seems two things could happen if we let central banks call the shots and both are bad. One, they’re going to be so scared of screwing up that every time the economy picks up a little steam the brakes get slammed on. Or two, they will be just about as effective as the Fed was in spotting the dot.com and housing bubbles. In other words they will miss it completely.

I guess by now you have surmised that I don’t think much of this idea. The new conventional wisdom seems to be that if we are just on guard for future bubbles and other assorted financial maladies we can control and avoid them. I’m sure that same logic prevailed at the time tulip bulbs were in vogue. History would seem to indicate that despite all of our attempts to make it otherwise so, we are human and prone to doing very stupid things.

Personally, I’d just as soon Barney Frank and similar buffoons were left in charge of all of this. At least I have a reasonably good idea of who’s paying them off and they do have to operate in some sunlight sometimes. I have a fighting chance of figuring out who has the fix in. Give the power to some central banker and we’ll never be able to figure out who’s passing the money under the table.

more: WSJ Economics Blog

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