gw bermimp1 1 hari nant1, dunia sama sekal1 TANPA BANK $ENTRAL
fungsi moneter BANK SENTRAL AKAN DIGANTIKAN OLEH LEMBAGA NEGARA atawa MULTILATERAL yang FOKUS PADA 1 FUNGSI NEGARA yaitu MONETERIStik
apa seh moneter itu ?
(ekstremnya, satu hari nante, fungsi bank sentral digantikan oleh DRONE + ROBOT… :P)
WORLD without CENTRAL BANKS
smh: Bitcoin surpassed $US11,000 in a matter of hours after hitting the $US10,000 milestone, taking this year’s price surge to almost 12-fold as buyers shrugged off increased warnings that the largest digital currency is an asset bubble.
The euphoria is bringing to the mainstream what was once considered the provenance of computer developers, futurists and libertarians seeking to create an alternative to central bank-controlled monetary systems. While the actual volume of transactions conducted in cryptocurrencies is relatively small, the optimism surrounding the technology continues to drive it to new highs.
Exploding tenfold over the course of 2017, the virtual currency of bitcoin has reached an all-time high exchange rate of $10,000.
Some on Wall Street are embracing the run, with more than 100 hedge funds now dedicated to digital currencies. Others are issuing dire warnings, with Nobel Prize winner Joseph Stiglitz saying it ought to be outlawed as it “doesn’t serve any socially useful function.”
Bitcoin has risen by about 75 per cent since October alone, after developers agreed to cancel a technology update that threatened to split the digital currency. Even as analysts disagree on whether the largest cryptocurrency by market capitalisation is truly an asset, its $US178 billion ($235 billion) value already exceeds that of about 95 per cent of the S&P 500 Index members and is driving the debate about where financial technology is headed.
“It feels frothy, of course,” said Bob Diamond, chief executive officer of Atlas Merchant Capital, said in a Bloomberg television interview with Francine Lacqua. “I think the issue here is the disruptive nature of technology” for banks. “Whether it’s the application of blockchain, or their core processing, or delivery to customers or clients, financial services today is being disrupted by technology.”
Fed nominee comments
The rising profile of digital currencies even saw bitcoin feature in the Senate confirmation hearing Tuesday for Federal Reserve chairman nominee Jerome Powell, who’s a current board member. Answering a senator’s question, he said that “cryptocurrencies are something we monitor very carefully,” and that at some point their volumes “could matter” for monetary policy, though not today.
“It really is a validation of the fact there’s real enthusiasm, real value and maybe a use case for bitcoin and other cryptocurrencies,” said Arthur Hayes, co-founder and chief executive officer with BitMEX, a Hong Kong-based cryptocurrency derivatives venue. “It’s the start of broader attention and adoption by the investing public.”
There’s no agreed authority for the price of bitcoin, and quotes can vary significantly across exchanges. In Zimbabwe, where there’s a lack of confidence in the local financial system, the cryptocurrency has traded at a persistent premium over $US10,000. Volumes are also difficult to assess. Bloomberg publishes a price that draws on several large bitcoin trading venues. It was at $US11,254.75, up 13 per cent, as of 9:16 a.m. New York time.
From Wall Street executives to venture capitalists, observers have been weighing in, with some more skeptical than others as bitcoin’s rise has grown steeper, sweeping along individual investors. The number of accounts at Coinbase, one of the largest platforms for trading bitcoin and rival ethereum, has almost tripled to 13 million in the past year, according to Bespoke Investment Group LLC.
In a move toward mainstream investing, CME Group Inc. has said it plans to start offering futures contracts for bitcoin, which could begin trading in December. JPMorgan Chase & Co., the largest US bank, was weighing last week whether to help clients bet on bitcoin via the proposed futures contracts, according to a person with knowledge of the situation.
“This is going to be the biggest bubble of our lifetimes,” hedge fund manager Mike Novogratz said at a cryptocurrency conference Tuesday in New York.
Novogratz, who’s says he began investing in bitcoin when it was at $US90, is starting a $US500 million fund because of the potential for the technology to eventually transform financial markets.
The total market cap of digital currencies now sits north of $US330 billion, according to data on Coinmarketcap.com’s website.
For Peter Rosenstreich, head of market strategy at online trading firm Swissquote Bank SA, bitcoin’s surge harks back to the surprises of the UK referendum on European Union membership and President Donald Trump’s election.
“We have underestimated the populist movements,” he said. “There is growing unease on how central banks and governments are managing fiat currencies. Ordinary people globally understand why a decentralized asset is the ultimate safe haven.”
For the past 70 years, Japan has been a crucible of experimentation in economic policy. During its go-go years, Tokyo’s unusual practices to spur rapid growth became a model for much of the rest of Asia, while its unconventional attempts to revive its post-bubble economy have helped economists understand what should and could be done to recover from financial crises.
Now Japan may be offering the world yet another lesson in economics — on the outer limits and ultimate effectiveness of monetary policy itself.
Bank of Japan Governor Haruhiko Kuroda disappointed investors on Friday when he offered only a minor boost in his asset-buying program as his latest effort to beat deflation and raise growth. With talk of “helicopter money” and other exotic strategies, many had convinced themselves that the BOJ would try to surprise markets with a much more dramatic decision. Voices immediately called for greater action. “We still expect the Bank to do more,” wrote economist Marcel Thieliant of Capital Economics in a Friday note.
In his press conference, Kuroda insisted that he wasn’t done yet — there were more bonds to buy, more rate cuts to try. But the truth is, at this stage, three years into his radical program to restart Japan, the BOJ might just be a spent force. As HSBC economist Frederic Neumann put it in a Friday report: “Today’s decision suggests that the BOJ has reached the limits of its current policy framework.”
Kuroda has already thrown everything into his fight to save Japan. Through his extensive program of quantitative easing, his bank now holds a third of all outstanding government bonds, and some experts believe there are limits to his ability to buy more and more of them. Yields on many of these bonds are already negative, which means the investors who are lending their money to the government are paying for the privilege. The total assets of the BOJ have more than doubled in the just the past three years.
Even if Kuroda could expand the easing program, there’s little reason to think it will make a big difference. At this point, further rate cuts or more bond-buying would only be on the margins of his actions thus far. And those haven’t gotten the BOJ very far. By one key measure, the economy sunk deeper into deflation in June. Earlier this month, the International Monetary Fund reduced its growth forecast for 2016 to an anemic 0.3 percent.
The fact is that BOJ can pump out as much cash as it wants, but unless companies and consumers use it to invest and spend, Kuroda’s “bazooka” can only fire blanks. The government simply hasn’t advanced the critical reforms — from deregulation to labor market repair — that would unleash new opportunities and convince investors to borrow, build and create.
Arguably, the case could be made that Japan would be much worse off without Kuroda’s experiments. But with so much largesse creating so little positive effect, we at least need to question if further easing could achieve that much more. In fact, greater action could have a damaging effect, by further straining banks and punishing savers. And those concerns are only going to grow over time. Kuroda may need to pretend he has unlimited room to maneuver in order not to spook markets. But he’s running a high risk of underwhelming them again, given the very real constraints on action.
There are uncomfortable lessons here for other central bankers. Mario Draghi, president of the European Central Bank, is, like Kuroda, under constant pressure to take more drastic steps to stoke inflation and growth. But Kuroda’s experience should act as a warning that his bank may eventually hit a ceiling as well. In China, where policymakers are easing money to spur growth, the BOJ’s traumas are clear proof that expanding cash without implementing true structural reforms only goes so far.
Kuroda’s only hope may be to tinker further with his unorthodox policies and take even more radical decisions — such as lending to banks at negative rates. Perhaps Japan will continue to be a laboratory of economic innovation. The results, though, are likely to be sobering.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
marketwatch: During the financial crisis of 2008-09, politicians facing difficult and electorally unpopular decisions cleverly passed the responsibility for the economy to central bankers. These policymakers accepted the task to nurse the global economy to health.
But there are increasing doubts about central banks’ powers and their ability to deliver a recovery.
Policymakers have engineered an artificial stability. Budget deficits, low-, zero-, andnow negative interest rates , and quantitative easing (QE) have not restored global growth or increased inflation to levels necessary to bring high-debt under control.
Instead, low rates and the suppression of volatility have encouraged asset-price booms in many world markets. Since prices of assets act as collateral for loans, central banks are being forced to support these inflated values because of the potential threat to financial institutions holding the debt.
As the tried and tested policies lose efficacy, new unconventional initiatives have been viewed by markets with increasing suspicion and caution.
Do negative interest rates work?
(2:36)WSJ’s Jon Hilsenrath and Nell Henderson talk about today’s ‘bizarre negative world’ of interest rates and the reasons behind such unconventional moves.
Key to this debate is negative interest rate policy (NIRP), now in place in Europe and Japan, and most recently affecting German bonds.
Markets do not believe that NIRP will create the borrowing-driven consumption and investment that generates economic activity. Existing high-debt levels, poor employment prospects, low rates of wage growth, and overcapacity have lowered potential growth rates, sometimes substantially. NIRP is unlikely to create inflation for the same reasons, despite the stubborn belief among economic clergy that increasing money supply can and will ultimately always create large changes in price levels.
There are toxic by-products to this policy. Low- and negative rates threaten the ability of insurance companies and pension funds to meet contracted retirement payments. Bank profitability also has been adversely affected. Potential erosion of deposits may reduce banks’ ability to lend and also reduce the stability of funding.
The capacity of NIRP to devalue currencies to secure export competitiveness is also questionable. The euro EURUSD, -1.0303% , yen USDJPY, -2.01% and Swiss franc have not weakened significantly so far, despite additional monetary accommodation. One reason is that these countries have large current account surpluses: the eurozone (3.0% of GDP), Japan (2.9% of GDP), and Switzerland (12.5% of GDP). The increasing ineffectiveness of NIRP in managing currency values reflects the fact that the underlying problem of global imbalances remains unresolved.
Moreover, the manner of policymaking is unconvincing. The Federal Reserve’s attempt to normalize interest rates has been confused and contributed to instability. The European Central Bank looks increasingly impotent. The Bank of Japan’s insistence on its ability to launch new measures to reinvigorate the economy ring hollow.
Meanwhile, Chinese policymakers, until recently applauded as exemplary economic managers, have struggled to bring the country’s stock-market slide under control despite numerous expensive attempts. The People’s Bank of China has also struggled to prevent capital outflows or avoid pressure to devalue the yuan. Facing slowing growth and unwilling to reform quickly, China is reverting to a strategy of increasing spending and bank lending.
These new policies also frequently seem half-hearted. Japan’s NIRP proposals only affect a small part of the financial system, apparently to avoid destabilizing banks. China’s extra stimulus is mixed with intermittent warnings about excessive debt from “authoritative sources” creating confusion.
Despite the International Monetary Fund urging bold, broad measures, the G20 shows little appetite for new initiatives.
The weakness in the U.S. dollar DXY, +0.59% following the March 2016 Shanghai Summit led to suggestions that the leading economies had agreed to lower the value of the dollar. This would alleviate pressure on China from a stronger yuan. It would also support commodity prices assisting lenders that have overextended themselves providing credit to commodity producers. But after a short period of stability, the accord, it there ever was one, seems to have unraveled.
International cooperation is eroding into conflict
Each nation now targets fiscal and monetary policy on domestic objectives, while paying lip service to not seeking currency devaluation or beggar-thy-neighbor policies. International cooperation is eroding into conflict. There is growing recognition that available options have diminished. ‘Helicopter money’, effectively governments making payments to citizens, is merely a novel form of government spending funded by debt purchased by the central bank or by creating money. It is unclear why these policies — which have been tried repeatedly since 2009 — will be more successful this time.
Policymakers are also unable to defend their actions. They rely on contra-factual arguments, asserting that their policies are successful because in their absence things would have been worse. What is clear is that the loss of faith in central banks poses a significant threat to the stability of the global economy and markets.
Satyajit Das is a former banker and author of The Age of Stagnation (Prometheus Books).
UPDATE: What if central banks were no longer independent?
By Joachim Fels
Inflation expectations would rise as the government expands its influence
Here’s a secular question for you: What if central banks weren’t independent?
At Pimco we have just wrapped up our annual Secular Forum, where we discuss the forces driving the global economy and formulate our outlook for the three- to five-year horizon, along with risks to that baseline view. (Click here for more information about the forum (https://sites.pimco.com/secular-outlook), including an essay by Rich Clarida and a list of speakers.) Inspired by the free-thinking, forward-looking debate at the forum, I would like to address the status of what has been a given: central bank independence.
Central bank independence is widely accepted as a necessary prerequisite for successful monetary policies. But considering political sentiment these days, along with the decline in inflation over the past few decades, there is a chance that this independence could come into question. If so, that scenario is not as scary as you might think. Hear me out …
Independence from government and the political process is obviously helpful when the main enemy is high inflation, as it enhances a central bank’s credibility and helps monetary policy makers do tough things without political interference. One example is the “Paul Volcker recession” of the early 1980s, which was necessary to end the Great Inflation.
But what happens when the main enemy is not inflation, but deflation, debt overhangs and financial crises — in other words, the world since 2008? Critics point out how the need or desire to defend their independence often hinders central banks from swiftly addressing these problems in the most direct and effective way (say, helicopter money or overt lender-of-last-resort action to underwrite troubled financial institutions or sovereigns).
Instead, independent central banks have had to deploy second-best interventions such as quantitative easing (QE) or negative interest rate policy (NIRP), which distort financial markets and can have severe distributive consequences. This actually has exposed central banks to severe criticism on two fronts — criticism of the second-best policies with their unforeseen effects and diminishing returns, and criticism for making decisions that the observers say belong in the hands of elected officials.
The not-too-distant past
It is worth remembering that central bank independence is a relatively new phenomenon. In the large majority of cases, central banks in the developed world gained independence in setting monetary policy only in the 1980s or as recently as the 1990s. The Bank of England was founded in 1694 but only gained operational independence to pursue a 2% inflation goal (set by the government) in 1997, which was year 303 of its existence.
The main rationale for making central banks independent was to enhance the credibility of inflation-targeting monetary policy, which became the standard approach to monetary policy after the demise of the gold standard and the ensuing Great Inflation of the 1970s and early 1980s. High and volatile inflation had become the economy’s main enemy, and the solution was to focus monetary policy exclusively on stabilizing inflation at low levels, with independence making that task easier to achieve.
But there’s an asymmetry in monetary policy — central banks can do more to restrain inflation than they can do to stimulate it. The main problems today, and most likely also over our secular horizon, are continuing disinflationary or even deflationary global forces, public and private-sector debt overhangs and the potential for new financial crises.
Many observers ask whether central banks have exhausted the capacity of the ordinary and extraordinary policy tools they have deployed since the financial crisis. Some of those observers may go on to say that central banks would be better equipped to counter the challenges in today’s economy if they worked in close collaboration with and under the control of a democratically legitimized government.
One argument for direct government involvement and responsibility is that many of the decisions that are required to address today’s greatest problems have significant distributive consequences and are thus in the realm of fiscal policy rather than monetary policy. Think of the decision to save one major financial institution or let another one go bust (many names spring to mind from the 2008–2009 financial crisis). Think of the decision to serve as lender of last resort to weak sovereigns (several names spring to mind from the more recent eurozone crisis). Or think of the decision to buy large amounts of public and/or private sector assets and introduce negative interest rates to (try to) bring inflation back up to target. All of these decisions are tough ones to make for an independent central bank that, if it decides to make them, will be harshly criticized by those who lose out in the redistribution that follows.
Independent central banks also often serve as easy scapegoats for politicians who balk at making tough decisions themselves. Again and again during the eurozone crisis, governments shied away from solving the sovereign debt and banking crises once and for all with fiscal instruments. Rather, they relied on the European Central Bank to step in, only to criticize monetary policy later for having overstepped its boundaries.
Eyes on the prize
If the (nearly) unthinkable came to pass and central banks came back under government oversight in setting policy, what would it mean in practical terms for the economy and markets? An almost immediate effect would be to raise inflation expectations as the government expands influence in monetary policy.
Also, central banks could bypass the entire financial sector by endowing the government directly with freshly created money (e.g., crediting the Treasury’s account at the Fed) that the government could then distribute to the public through tax-rebate checks or increased public spending — helicopter money. This could be a much more direct and effective way to overcome a demand deficiency and raise inflation expectations than using QE to remove financial assets that are in high demand (i.e., government bonds or high quality corporate bonds) or embarking on NIRP, which is an experiment with an uncertain outcome.
True, there are other ways to implement helicopter money than doing away formally with central bank independence. Former Fed Chair Ben Bernanke has made a very interesting proposal of how this could work. Essentially, the idea is for the independent Fed to decide how much money injection would be needed to achieve the mandated employment and inflation objectives and to credit the Treasury account with this amount. It would then be up to the government to distribute the money in any way it deems fit.
Targeting today’s problems
Critics contend that the main problem with central bank independence is that it was invented to solve a problem — high inflation — that no longer exists. Does their independence hinder central banks from pursuing the most direct and efficient solutions to today’s problems?
Trust me, for an economist born and raised in Germany to believe that the independent Deutsche Bundesbank should be the benchmark for all central banks, this is not an easy question to ponder. But the reality remains: Aggressive independent monetary policies across the world haven’t yet delivered inflation, and fiscal foot-dragging persists. A union of fiscal and monetary policy may become an option if the economy continues along this path.
Joachim Fels (https://www.pimco.com/experts/joachim-fels) is a managing director and global economic advisor at Pimco. The views expressed here are his own. This was first published on Pimco’s website as “The Downside of Central Bank Independence” (https://www.pimco.com/insights/economic-and-market-commentary/macro-perspectives/the-downside-of-central-bank-independence).
-Joachim Fels; 415-439-6400; AskNewswires@dowjones.com
RELATED: Central banks shouldn’t rely on QE, negative interest rates, helicopter money (http://www.marketwatch.com/story/central-banks-shouldnt-rely-on-qe-negative-interest-rates-helicopter-money-2016-05-18)
RELATED: Draghi plays defense as ECB faces political assault (http://www.marketwatch.com/story/draghi-plays-defense-as-ecb-faces-political-assault-2016-04-21)
RELATED: Fed’s structure is broken and needs overhaul, former insider says (http://www.marketwatch.com/story/feds-structure-is-broken-and-needs-overhaul-former-insider-says-2016-05-04)
RELATED: How the Fed ignored the constitution and played favorites during the 2008 crisis (http://www.marketwatch.com/story/how-the-fed-ignored-the-constitution-and-played-favorites-during-the-crisis-2016-04-25)
(END) Dow Jones Newswires
roubini econmonitor: Satyajit Das While the central bank and government policies have stabilised conditions, they have not restored growth or created sufficient inflation to address the world’s debt problems. As Helmuth von Moltke, a 19th century head of the Prussian army, observed: “No battle plan ever survives first contact with the enemy”.
Given that the bulk of recent growth was driven by debt fuelled consumption and investment, slower credit growth has predictably affected the level of economic activity. Slower population growth, lack of new markets with most nations integrated into the global trading system, slower rates of innovation, slower productivity improvement, an aging population in developed nations, declines in science education, the effect of climate change and decreasing return on investment in energy and food combined with the overhang of debt will limit growth for some time.
There is also little evidence of inflation, although asset prices have increased sharply in response to low interest rates.
From a policy perspective, inflation would assist in reducing debt levels by increasing nominal growth rates above the nominal interest rate. It would decrease purchasing power reducing the value of debt. Where the debt is held by foreign investors, it would reduce the value through depreciation of the currency. Inflation may also induce more consumption, as people accelerate purchases, anticipating higher prices in the future.
Policy makers fear deflation. General tax revenues would stagnate or even fall. Asset price falls would also reduce tax revenues. There would be an appreciation in the real value of debt. The high level of borrowing would be increasingly difficult to service, with serious consequences for the banking system.
The premise is that expanding money supply will create inflation as the monetary claims on real goods and services increases causing higher prices. In practice, the process is complex, with additional conditions needed to create inflation.
Central banks control the monetary base, a narrow measure of money supply made up of currency plus the reserves that commercial banks hold with the central bank. The relationship between the monetary base, credit creation, nominal income and economic activity is unstable. While the money supply has increased, the velocity of money has slowed.
The liquidity supplied is being held by banks as excess reserves with the central banks. Banks have not increased lending reflecting a lack of demand for credit and unwillingness to lend because of capital or other constraints. Reductions in permitted banking leverage, onerous liquidity controls and restrictions on risk transfer processes, such securitisation and derivatives, also affect the circulation of funds. The reduced velocity of money offsets the effect of increased money flows.
Inflation also requires an imbalance between demand and supply. Most developed economies have a significant “output gap” ranging from 2% to 8% (the amount by which the economy’s potential to produce goods exceeds total demand), though the extent is uncertain due to drops in participation in the labour force which may have reduced capacity. The gap reflects lower demand but also excess capacity. In many industries, such as automobiles, national and political considerations have meant maintenance of uneconomic operations. This translates into a lack of pricing power and low price inflation.
Economist Wynn Godley may have been correct when he observed that: “Governments can no more control stocks of either bank money or cash than a gardener can control the direction of a hosepipe by grabbing at the water jet”.
While ineffective in achieving its targeted outcomes, current policies have toxic by-products.
Expansionary fiscal policies have left many countries with large levels of sovereign debt. While there is debate about the sustainable level of government borrowing, there is agreement that high debt levels may adversely affect growth.
High levels of government debt also reduce flexibility and increase the risk of financial distress. The rapid build-up of government debt following the events of 2007/ 2008 now restricts the ability of many governments to respond to new crises.
ZIRP and QE distort normal economic activity.
Low interest rates reduce the income of retirees living off their savings, decreasing demand. Low rates perversely reduce consumption and increase savings as lower returns force people to set aside larger amounts for future needs.
Low rates artificially lower the cost of capital, favouring the substitution of labour for capital goods in the production process. Reduced employment which results in reduced income and consumption ultimately decreases economic activity.
CitiGroup equity strategist Robert Buckland argues that low rates and QE actually reduce employment and economic activity, rather than increasing them. These policies encourage a shift from bonds into equities. But as investors are looking for income rather than capital growth from shares, they force companies to increase dividends and undertake share buybacks.
To meet these pressures, companies boost cash flow and earnings by shedding workers and reducing investment to cut costs. This increases unemployment and reduces consumption, but increases equity prices. Low rates increase unfunded liabilities of defined benefits pension funds. These shortfalls ultimately retard growth as sponsors must divert earnings to meet these future liabilities.
Low rates ‘zombie-fy’ the economy. Low rates allow weak businesses to survive, directing cash flow to cover interest on loans which can never be repaid but which banks cannot afford to write off. This ties up capital and reduces lending to productive enterprises, especially SMEs which account for a large portion of economic activity and employment. Firms do not dispose of or restructure underproductive investments. The creative destruction and re-allocation of resources necessary to restore the economy’s growth potential does not occur.
Low rates distort investment, encouraging excessive risk taking in search of higher returns. Risk premiums have fallen sharply to uneconomic levels in equities, dividend paying stocks, corporate debt, high yield bonds, structured securities and other risky assets.
The rush to re-risk has reduced general lending standards. Practices that contributed to the global financial crisis, such as reduced lending standards have re-emerged, driven by investors seeking additional return. Covenant lite loans, with low protection for lenders, are driving a resurgence of private equity activity. Borrowing to pay dividends to investors in private equity transactions has also risen. Even sub-prime loans and securitisations, in automobiles and commercial real estate, have re-commenced. These risks are compounded by the continued high levels of leverage in financial institution.
Many stock markets in developed countries, led by the US, recovered to their pre-crisis levels. The celebrations ignored the basis of the recovery, which was the excess liquidity that had been injected into the global economy by central banks.
The low rates, mispricing of risk and excessive debt levels that were the causes of the crisis are now considered the ‘solution’. It is reminiscent of the observation of Viennese critic Karl Krause about psychiatry: “the disease which masquerades as the cure”.
time.com: Central banks are pulling out all the stops to turn around the global economy.
They’re pumping money into their economies, creating negative interest rates and buying billions of dollars in bonds. Yet experts are worried some of these strategies will not be enough to turn around the slump in the world.
“Major central banks have run out of ammo,” says Ed Yardeni, chief investment strategist at Yardeni Research.
Central bankers are trying to stabilize their economies and currencies as they navigate through the volatility of the global slowdown, market meltdowns and investors pulling cash out.
But many admit they don’t know what to do next.
“The world is an uncertain place, and all monetary policymakers can really be sure of is that what will happen is often different from what we currently expect,” Stanley Fischer, the No. 2 at the U.S. Federal Reserve, said in a recent speech.
Fischer and other central bank leaders are arguably running out of new tools to turn things around. The European Central Bank could buy more bonds in a few weeks to stimulate the continent’s economy but its leaders know that’s not a long-term solution.
“We are ready and able to play our part in the recovery,” ECB board member Benoît Coeuré said in a recent speech. “But for the recovery to become structural…monetary policy does not suffice.”
Amid all the volatility and uncertainty, experts are growing concerned that all these recent moves are merely a short-term boost and they lack a long-term solution.
Many experts argue that Congress and its global counterparts need to step up by providing policies that promote growth, such as spending on projects to build new roads, bridges and railways.
Low interest rates are “making us into drug addicts — we need more and more to achieve the same high. Eventually, we crash and burn without intervention,” says Sharon Stark, fixed income strategist at D.A. Davidson, an investment bank.
Stark is referring to the “easy money environment” central banks have created. It means businesses can cheaply borrow money and thus are incentivized to spend — a good thing.
But it also generates an environment where investors take more risk, borrowing money for cheap and plowing it into stocks, which artificially pumps up the value of the market. And that doesn’t translate to the broader economy.
Many experts like Stark believe “easy money” will be a long-term negative for the U.S. economy and others.
The global central banks’ moves also magnify how much of a burden they’ve taken on for the global economy’s performance in the absence of policies from the legislative branch.
In a perfect world, the Fed’s policies and Congress’ spending on projects would complement each other.
But since the financial crisis in 2008 the Fed’s role in managing the economy has greatly increased while Congress suffers through gridlock, epitomized by the government shutdown in October 2013.
Janet Yellen leads America’s central bank, the Federal Reserve, which is often considered the world’s central bank. She testifies Wednesday before Congress and she’ll likely be questioned about the economy and the central bank’s intentions.
On Monday, Chinese central bank officials announced they spent more money in January — on top of the $500 billion from last year — to prop up the country’s currency, the yuan. Two weeks ago, Japan’s central bank introduced negative interest rates hoping to encourage businesses and consumers to borrow more and help boost the economy.
These actions come on the heels of the Federal Reserve raising rates in December for the first time in nearly a decade. It’s unlikely the Fed will raise rates again in March amid all the global market turmoil.
Despite their efforts, the global economy isn’t improving. The world can’t solely depend on central banks much longer.
“We can no longer rely on central banks,” investing guru Mohamed El-Erian, author of the new book “The Only Game in Town” recently told CNNMoney. “They’ve done all they can do and a bit more.”
bbc.com: There is little agreement in the United States at the moment, but when it comes to the Federal Reserve, many Americans feel their central bank is broken, pointless or at worst bad for the country.
Just a third of Americans felt the Fed was doing a good or excellent job, according to the last Gallup poll to check on the bank’s popularity. The only US federal agency with a consistently lower approval rating was the IRS, the Internal Revenue Service or tax collector.
Politicians on both sides of the aisle have taken swipes at the Fed.
Republicans chastise the bank for its prolonged policy of low interest rates. Republican presidential candidate Donald Trump accused the Fed of keeping interest rates low to protect President Obama.
Democrats, meanwhile criticise attempts to raise rates.
In August, activists from the liberal-leaning Fed Up campaign protested outside a Fed meeting in support of low interest rate, saying that they say help low income families.
“There is no question that [the Fed’s] reputation has taken a hit from the extreme left and the extreme right,” says Donald Kohn, a Federal Reserve governor from 2002-2010.
Alan Greenspan’s tenure
It wasn’t always like this though. Under the tenure of Alan Greenspan – who served as the Fed’s chairman from 1987 to 2006 – many felt the central bank was a positive force for the economy.
During the 1990s US unemployment reached 4% while inflation remained low.
Mr Greenspan’s approval rating was 72% when he left the Fed. According to Allan Meltzer, author of The History of the Federal Reserve, Mr Greenspan’s tenure was “the best period in Federal Reserve history”.
He wasn’t without critics.
President George HW Bush and Republican members of Congress criticised Mr Greenspan and the Fed for raising interest rate in 1994. President Bush even accused Mr Greenspan’s policy of costing him the election against Bill Clinton.
Experts say many of the policies that helped the economy grow under President Clinton can really be credited to Mr Greenspan.
However, since the financial crisis politicians and economists have pointed to the loose monetary policies he championed as a factor leading to the crash.
Mr Greenspan also believed it was the Fed’s duty to “to serve as a source of liquidity to support the economic and financial system.”
This policy was a precursor to the 2008 bank bailouts.
Bailing out the banks
According Mr Meltzer, the Fed’s decision to bailout the banks has shaped many Americans’ current distrust of the central banking system more than the prolonged period of low interest rates.
“The public doesn’t think the government should be in the business of bailing out banks,” he says.
Politicians on both sides of the aisle have criticised the bailout, saying it helped banks at the expense of the American tax payer.
“If big financial institutions know they can get cheap cash from the Fed in a crisis, they have less incentive to manage their risks carefully,” says Senator Elizabeth Warren, a Democrat who has built a reputation for challenging Wall Street.
Supporters of the Fed’s bailout action argue it was necessary and see the anger it created as a symptom of the suspicion that already existed.
“The perception that expanding the discount window bailed out the big banks at the expense of Main Street comes from a long history of distrust a lot of Americans have in New York and Washington,” says Mr Kohn.
Disliked from the start
America’s distaste for central banks is not new. The country’s founders fought over whether a central bank was necessary.
Alexander Hamilton – America’s first secretary of the treasury – urged the creation of an institution to help manage a single currency for the new country and stabilize the states’ credit.
Opponents, including Thomas Jefferson – the third president of the US – saw the central bank as an unnecessary consolidation of power.
They argued it benefited investors, banks and businesses above the wider population.
The US had two central banks before the Fed. Both only lasted 20 years.
President Andrew Jackson, who opposed renewing the charter of the second US central bank, famously referred to it as “a den of vipers and thieves”.
The Federal Reserve itself was founded in 1913 in response to several financial crises.
Despite surviving 102 years the bank has been regularly flogged for failing to prevent financial crises, including the Great Recession.
The recent criticism of the Fed is not that different from the criticism central banks received at the country’s founding – favouring bankers and too much centralisation of power.
“The US already had a strong culture of freedom and it sees central banks as an opponent of freedom and a source of centralization that many dislike,” says Mr Meltzer.
This time around
To raise interest rates this time around the Fed will use a new method that has been criticised as benefiting banks.
Traditionally, the Fed increases the amount of securities it sells to banks. This forces banks to charge higher interest rates to bring in revenue to pay for the securities they are buying.
This time, the Fed will pay banks a higher interest rate for storing reserves at the central bank. If banks make more money holding reserves at the Fed they have no incentive to charge low interest rates.
Critics say the Fed should not be in the business of funding banks’ profits.
Becoming more likable
It is difficult, given America’s history, to say what might make the Fed more appealing.
In 2013, 74% of American supported auditing the Fed’s decisions and finances. A new bill to increase the amount the Fed is already audited has been proposed by Republican Senator Ran Paul.
At this point the only thing that might improve the Fed’s reputation is time and an improving economy.
But regardless of whether the Fed gets the decision right on Wednesday the critics will still be out there.
Washington – Satu RUU yang para kritikus katakan akan mempolitisasi pembuatan kebijakan Federal Reserve. Itu bahkan bisa membahayakan ekonomi AS disahkan DPR, Kamis (19/11/2015), karena dukungan yang kuat dari Partai Republik.
Tetapi rancangan undang-undang itu memiliki sedikit peluang dalam waktu dekat ini menjadi undang-undang, karena masih harus disahkan oleh Senat dan kemudian pergi ke Presiden Barack Obama, yang telah mengancam akan memvetonya. Undang-undang Pengawasan Reformasi Modernisasi Fed (FORM Act) akan membentuk patokan formulasi untuk mengukur hasil dari kebijakan moneter The Fed dan memungkinkan Kantor Akuntabilitas Pemerintah menilai kinerja relatif bank sentral terhadap peraturan. RUU tersebut juga akan membatasi kemampuan The Fed untuk mendukung lembaga keuangan bermasalah lebih jauh seperti dalam krisis ekonomi 2008.
Para pendukungnya mengatakan RUU itu akan membuat The Fed lebih transparan dan akuntabel dalam membuat kebijakan moneter, dan mencegahnya dari menghabiskan uang pembayar pajak untuk mempertahankan bank-bank bangkrut tetap hidup. FORM Act disahkan DPR dengan suara 241-185. Ketua DPR dari Partai Republik Paul Ryan menyambut baik undang-undang tersebut.
“Jika Federal Reserve menjelaskan kepada publik bagaimana ia membuat keputusan-keputusannya, orang-orang Amerika akan memiliki keyakinan yang lebih besar di dalamnya. Keluarga-keluarga bisa membuat rencana yang lebih baik untuk masa depan, menginvestasikan uang mereka dengan bijak dan menciptakan peluang bagi kita semua,” tegas dia dalam sebuah pernyataan setelah pemungutan suara.
Tetapi Ketua The Fed Janet Yellen memperingatkan minggu ini dalam sebuah surat yang secara tegas menentang RUU yang akan mempolitisir kebijakan moneter dan sangat merusak ekonomi AS itu menjadi undang-undang. RUU itu juga kemungkinan menyebabkan … berkurangnya status dolar di pasar keuangan global, serta mengurangi stabilitas ekonomi dan keuangan.
Gedung Putih mengatakan awal pekan ini bahwa RUU itu mengancam salah satu pilar utama dari sistem keuangan negara dan ekonomi.
forbes: Out of the “currency wars” of the 1930s, and then World War II, came a shared dream among the non-communist states: to establish a stable economic environment for business and trade. Representatives from forty-four countries met at the MountWashington Hotel in Bretton Woods, New Hampshire, and recreated the world gold standard system.
The U.S. dollar was officially linked to gold at $35/ounce, its gold parity since 1934. Other currencies were linked to the dollar at fixed exchange rates, which effectively meant that they were linked to gold as well. The Japanese yen was 360/dollar, year after year. (360*35=12,600/oz.) The German mark was 4.20/dollar.
In June of this year, former Federal Reserve chairman Paul Volcker spoke at the annual meeting of the Bretton Woods Committee, and pined for the world in which he grew up and began his career.
Volcker was under-secretary of the Treasury for international monetary affairs from 1969 to 1974. The U.S. ended the Bretton Woods’ system’s official link to gold in 1971, and the system’s final dissolution was in the spring of 1973.
That would give you quite a perspective on the evolution of things since then. His conclusions?
“By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth. …
That is all a long introduction to a plea – a plea for attention to the need for developing an international monetary and financial system worthy of our time.”
The rules of the “rules-based” Bretton Woods system were clear: the dollar was linked to gold at $35/oz., and other currencies were linked to the dollar, thus effectively linking them to gold as well.
If it’s that simple, and the results were good – the Bretton Woods era of the 1950s and 1960s was probably the most prosperous of the 20th century for the United States – then why not just recreate it?
Alas, the Bretton Woods system also had many problems – problems that were inherent in its creation.
The proper way to operate a gold standard system, and the proper way to institute fixed exchange rates with other currencies, is through what amounts to a currency board-type system. The daily operation of the system is automatic. There is no central bank policy board, interest rate policy, or anything of that sort. We have many currency boards in use today, and they work fine, as long as the proper operating principles are adhered to.
These currency board systems allow unimpeded foreign trade and capital flows, with no problems whatsoever.
But, that is not what the organizers at the Bretton Woods conference wanted. The idea of “central planning” of an economy was popular. The conference was held during wartime, when in fact even the U.S. economy was organized along lines not so much different than the Soviet system.
Rather, governments wanted to also be able to “manage” their economies through what amounts to funny-money manipulation – interest rate targets, monetary or credit growth targets, unemployment targets, trade balances, or other such things.
These two impossibly contradictory goals could only be sustained with heavy capital controls, and even then there were periodic currency devaluations. The British pound, once the world’s beacon of currency stability, was devalued in 1949 and 1967. The French franc was devalued twice in 1948, twice again in 1949, and again in 1957, 1958, 1960, and 1969.
The U.S. was playing the same game – trying to reconcile a “domestic monetary policy” of funny-money manipulation with an “external monetary policy” of fixed exchange rates — and, just as had been the case repeatedly in Britain and France, got to the point where it had to make a decision. Either the U.S. had to give up its funny-money ambitions, and return to the stable-currency discipline implied by the gold standard parity of $35/oz., or it would have to devalue.
Nixon devalued. At first, he wanted a devaluation like Britain or France, or the U.S. in 1933 – to re-establish the dollar’s gold parity at a lower value. In the Smithsonian Agreement of December 1971, only four months after the devaluation, the dollar’s new gold parity was supposed to be $38/oz. But, the Nixonites didn’t want to abide by the necessary gold-standard operating principles, at $35/oz., $38/oz., or at any gold parity. Fed chief Arthur Burns’ printing press was Nixon’s 1972 re-election strategy (it worked). In effect, the dollar had become a floating currency.
What a mess!
Thus, if we are going to meet again at a mountain resort hotel and build a new world monetary system (I suggest Davos), it would be good to review the failures – and successes – of the past.
First, the successes: the Bretton Woods gold standard system did indeed provide the monetary foundation for peace and prosperity throughout the world, for as long as it lasted. This was a bountiful time, for all levels of society.
Stable money works.
Second, the failures: the notion of combining a “domestic monetary policy” of funny-money manipulation with an “external monetary policy” of a gold parity or another fixed-value system was a total failure, even with the imposition of quite a lot of capital controls. This impossible contradiction led to the breakdown of the system in a brief 27 years, in the midst of peace and prosperity.
So, don’t do that.
Third, the construction of the Bretton Woods system, with its extreme reliance on U.S. dollar “reserve currency” assets instead of a direct link with gold bullion for currencies worldwide, was needlessly fragile. Although Britain and France devalued without any major repercussions beyond their borders, when the U.S. floated the “reserve currency,” the entire system blew up.
It would have been better for each country to have an independent link with gold bullion, and not be dependent on any “reserve currency.” This is much more robust, and has no particular difficulties.
Although I think most mainstream academics are still rather confused by the Bretton Woods era (as were economists who lived during that time), these basic problems are nevertheless well-recognized.
Lewis Lehrman was a member of the Congressional Gold Standard Commission of 1981, and co-author of the 1982 book A Case for Gold with co-commissioner Ron Paul. Although perhaps best known for his stint as the president of Rite Aid RAD +0.00% until 1977, he was also a managing director of Morgan Stanley during the 1980s.
More recently, he summed up his proposals in the 2012 book The True Gold Standard. The title continues: “A Monetary Reform Plan Without Official Reserve Currencies.”
The True Gold Standard actually contains a proposal for a U.S.-led international conference rather like the one at Bretton Woods. However, Lehrman’s proposal eliminates the excessive reliance on “reserve currency” assets such as U.S. dollar-based debt, and proposes a direct link to gold for participants, as was more often the case pre-1913 (although there were reserve-currency-based systems then too).
Lehrman’s proposal also includes a provision for “redeemability” of dollar base money into gold coin and bullion, and vice versa, on demand for all dollar users. This is a basic element of contemporary currency board systems, and also of historic gold standard systems.
The Bretton Woods system had it in the form of bullion redeemability for foreign central banks at the London gold market. However, gold bullion and coins had been made illegal for U.S. citizens to hold beginning in 1933, which continued to 1974. This was another major flaw in the Bretton Woods system, not only because it eliminated the basic operating mechanism of historic gold standard systems (redeemability), but because even the idea that the system was, fundamentally, a gold-based arrangement became little understood. This was a major political cause of its eventual breakdown.
With a focus on redeemability as a basic operating mechanism of the system, Lehrman’s proposal would avoid the basic contradiction that eventually blew up Bretton Woods: trying to combine both a Classical stable-money and Mercantilist funny-money approach in one ugly disaster.
We could have another Bretton Woods-like conference, followed by another two decades – better yet, two centuries – of peace and economic abundance.
But, we better understand what we’re going to talk about once we get there.
the history of Federal Reserve in the U$A:
The Panic of 1907 was a financial crisis similar to the Panic of 1893 but resulted in a legislative framework that far exceeded that of the 1893 and earlier crises. Because of the length and severity of the crisis, as well as the outsized role that J.P. Morgan played, there was considerable pressure for legislative reform of the banking system. To address the problems raised by the Panic of 1907, Congress passed the Aldrich-Vreeland Act in 1908 and the Federal Reserve Act in 1913.
The Panic of 1907 was precipitated by several events. First, there was stress on the American money supply due to reconstruction aid to San Francisco after the April 1906 earthquake and to the Bank of England’s rising interest rates due to British insurance companies paying out so much to American policyholders. Second, the Hepburn Act, which gave the Interstate Commerce Commission the power to set maximum railroad rates, became law in July 1906 and resulted in the depreciation of value of railroad securities. These events led to a slide of almost 18% in the New York Stock market between September 1906 and March 1907, which became known as the “Rich Man’s Panic.”
The economy remained volatile throughout the summer of 1907 with a continual drop in the value of stocks. A series of events contributed to this decline: the failure of the New York City’s bond offering, the collapse of the copper market, and the $29 million fine against the Standard Oil Company for antitrust violations. Abroad, there were several runs on the banks in Egypt, Japan, Hamburg, and Chile. By September, the value of stocks had dropped by 24.4%. On October 22, 1907, the Knickerbocker Trust, the second-largest trust company in the United States, was forced to suspend, triggering fear throughout the country and massive cash withdrawals from New York City banks.
The Treasury Department intervened with a $25 million deposit in New York banks, and J.P. Morgan organized a pool of $10 million, but these efforts were insufficient to stop the spread of panic. Public confidence needed to be restored as Morgan, the other banks, and even the U.S. Treasury were low on funds. The bankers consequently talked to the press to persuade them that the worst had passed; and, on Monday, October 26, the New York Clearing House issued $100 million in loan certificates to be traded among banks to settle balances while allowing them to retain cash reserves for depositors. These actions led to a return of stability on Wall Street, although specie payments did not fully resume until January 1908 after considerable imports of gold.
In November, a new set of crises emerged with J.P. Morgan playing a critical role in each of them once again. By purchasing $30 million of bonds, Morgan precluded New York City from declaring bankruptcy; by organizing a $25 million loan to the Trust Company of America and other weak financial institutions, Morgan stopped another potential run on the banks; and by persuading anti-trust busting President Roosevelt to allow U.S. Steel to acquire the Tennessee Coal, Iron and Railroad Company, Morgan was able to prevent another stock market crash. By the end of the year, the Panic of 1907 had ended with Morgan preventing a collapse of the entire financial and economic system of the United States.
In the aftermath of the Panic, there was a lengthy economic contraction from May 1907 to June 1908. According to economists Christine Romer, Nathan S. Balke and Robert Gordon, the stock of money fell 6.8% from the second quarter of 1907 to the first quarter of 1908 with estimates of real GNP falling from 4.3-5.6% from 1907 to 1908. Industrial production dropped further than any previous bank run and 1907 saw the second-highest volume of bankruptcies to that date. Production fell by 11%, imports by 26%, and unemployment rose from under 3% to 8%. The frequency and severity of the 1907 Panic, in addition to the outsized but critical role that Morgan played, created considerable pressure for reform of the financial system. This reform was directed at the banking system rather than the monetary standard, as the gold standard seemed to be in good working order when the crisis began.
In May 1908 Congress passed the Aldrich-Vreeland Act that permitted groups of banks acting in concert during emergencies to issue non-redeemable currency and withdraw them once the emergency had passed. Simply put, according to The Cambridge Economic History of the United States, Volume 2, the Act legalized and regulated what had happened under Morgan’s leadership during the Panic of 1907. More importantly, the Act also established the National Monetary Commission to investigate the Panic and to propose legislation to regulate banking. The Commission issued 23 studies by leading scholars of money and banking with a final volume of recommendations. The common theme in the reports was the need for the United States to have a lender-of-last-resort. The Commission submitted its final report in 1912; and on December 23, 1913, Congress passed the Federal Reserve Act very much consistent with the Commission’s recommendations.
The Federal Reserve Act created a new form of currency, the Federal Reserve Note, which could be issued rapidly to meet a sudden demand for cash in banking crises. The U.S. government would create and loan these Notes to banks secured by various forms of bank assets. The Notes also could be used to acquire gold, as the law required that they be backed by 40% by gold. To be the lender-of-last-resort, the Federal Reserve would have to have a sufficiently large reserve of gold and rely upon its ability to attract additional gold during a crisis. The Act therefore took for granted the continuation of the gold standard which was viewed favorably by the public.
The Federal Reserve Act also established a banker’s bank, although it was prohibited from making loans to business or private individuals. As the banker’s bank, the Federal Reserve was given supervisory power to ensure that banks were in compliance with reserve requirements and other regulations. However, the organization of the Federal Reserve made this task difficult as it was organized into twelve federal districts with a board of governors exercising overall supervision. Member banks were to hold their reserves in their district banks. The result of this arrangement was a struggle between the board of governors and the district banks, particularly the Federal Reserve Bank of New York, over issues of independence, authority, and supervision.
By being committed to the gold standard, the United States had to reduce its money supply when economic expansion produced balance-of-payment deficits. However, economic expansions also increased the demand for credit and therefore required an increase in the money supply. As the lender-of-last-resort, the Federal Reserve had to expand the money supply while, at the same time, deplete its gold reserves. As long as the gold standard was maintained, this policy was sustainable. World War I and its aftermath made adherence to the gold standard impossible and put the Federal Reserve into new territory for which it was not prepared.
Why do nations have central banks? Countries have developed without one, and sophisticated financial systems have evolved in their absence. Some countries with a central bank have suffered for having one. Zimbabwe comes to mind.
The Federal Reserve System was created by an act of Congress only in 1913. It then presided over a great wartime inflation followed by a major depression in 1920-21. The 1920s were an era of prosperity, due as much to Treasury Secretary Andrew Mellon’s wise fiscal policies as anything the Fed did. The Fed’s performance in the Great Depression was disastrous, a judgment shared by its current chairman, Ben Bernanke.
The Canadian banking system weathered the Great Depression without a central bank. Instead of the thousands of small, undiversified banks that the United States had, Canada had a small number of banks (with many branches across the country) that were able withstand localized downturns. Even in the Great Depression, banking failures in the U.S. were concentrated in specific regions. Canada’s central bank, the Bank of Canada, was created in 1935 in part because of pressure from the rest of the world. Canada had survived without it quite well.
In short, central banking has been neither necessary nor sufficient for the development of a modern economy and financial system. A number of reform proposals for the Fed are being crafted, but there is no agreement on why the institution exists.
Policy makers are debating the wisdom of the Fed’s dual mandate of providing price stability and full employment. Rep. Mike Pence (R., Ind.) has introduced a bill to amend the Federal Reserve Act to end the dual mandate and give the Fed one goal: maintaining price stability (H.R. 6406). The dual mandate is seen by many as giving the Fed an impossible assignment of simultaneously optimizing two variables with one policy tool. It is also not clear that a central bank is capable of maintaining full employment.
Yet maintaining stable prices was not part of the Fed’s original mandate and, aside from some economists, few thought it the Fed’s job. The gold standard provided for stable prices over time, and the Fed’s job was to maintain that standard (which does not require a central bank).
In the 19th century, the eminent British economist and journalist Walter Bagehot wrote Lombard Street: A Description of the Money Market as a treatise on the best central bank practice. Bagehot observed that the existence of the Bank of England centralized reserves in that institution. He preferred that banks provide for their own liquidity by holding a buffer of short-term marketable assets.
Bagehot’s goal was to devise central bank policy so that commercial banks would behave in ordinary times as if there were no central bank. In a liquidity crisis, commercial banks would turn to the Bank of England for support. That function, known as the lender of last resort, is the one carry-over to the Fed and all other central banks today. It appeared in the Federal Reserve Act as providing for an “elastic” currency, i.e., one whose quantity could grow or shrink at the Fed’s discretion.
The Fed’s first round of quantitative easing (printing money) was in response to the liquidity crisis of autumn 2008, which occurred in the wake of the Sept. 15 Lehman Brothers bankruptcy. It is not clear if QE was still needed by the time it was implemented at the end of 2008. It was likely too large and went on for too long. The Fed also forgot Bagehot’s dictum that a central bank should lend only on good assets at penalty interest rates. The latter principle was to ensure that emergency lending did not become a subsidy program. Economists will debate the episode for many years.
There is no liquidity crisis now, however, and no justification for continued lender-of-last-resort activity. There are quite possibly still large unrecognized losses on banks’ balance sheets associated with the housing collapse and other unwise lending. These losses mean such institutions are in reality undercapitalized, not short of liquidity.
The Fed’s critics increasingly see it as acting as an unelected fiscal authority. Its lending to select institutions constitutes credit allocation and surreptitious bailouts of large banks. Its policy of low interest rates is part of its bank support program.
Meanwhile, the economy suffers because none of the Fed’s policies will fix the banking system. The failure to fix the banks, not a nonexistent deflation threat, is what calls into mind Japan’s lost decade of the 1990s. Banks with large, unrecognized losses will not make new loans while losses from the old ones grow.
Regulators should be consistent in calling for banks to write down assets and recapitalize themselves (and not just apply the policy to smaller institutions that are being closed). Now is not the time for banks to raise dividends, as numerous large banks are seeking to do. Now is the time to raise capital. In the meantime, the Fed must stop conducting fiscal policy under the guise of monetary policy. Taxpayer bailouts of weakened banks would be a terrible idea. But, if done by Congress, it would at least be subject to democratic debate and be conducted in the open.
The Fed has been ceded a degree of operational independence by Congress to conduct monetary policy. That independence is viable only so long as the Fed sticks to conventional monetary policy. If it persists in acting also as a fiscal authority, ordinary citizens and their representatives are going to ask: Why do we have a central bank?
A Central Bank has various functions:
- Issue notes and coins and ensure people have faith in notes which are printed, e.g. protect against forgery.
- Target low inflation, e.g. the Bank of England have an inflation target of 2% +/- 1. See: Bank of England inflation target. Low inflation helps to create greater economic stability and preserves the value of money and savings.
- Growth and Unemployment. As well as low inflation a Central Bank will consider other macro economic objectives such as economic growth and unemployment. For example, in a period of temporary cost push inflation, the Central Bank may accept a higher rate of inflation because it doesn’t want to push the economy into a recession.
- Set interest rates to target low inflation and maintain economic growth. See: how bank of England set interest rates. Every month the MPC will meet and evaluate whether inflationary pressures in the economy justify a rate increase. To make a judgement on inflationary pressures they will examine every aspect of the economic situation and look at a variety of economic statistics to get a picture of the whole economy.
- Use other monetary instruments to achieve macro economic targets. For example, in a liquidity trap, lower interest rates may be insufficient to boost spending and economic growth. In this situation, the Central Bank may resort to more unconventional monetary policies such as quantitative easing. This involves creating money and using this money to buy bonds; the aim of quantitative easing is to reduce interest rates and boost bank lending.
- Ensure stability of financial system, e.g. regulate bank lending and financial derivatives
- Lender of Last Resort to Commercial banks. If banks get into liquidity shortages then the Central Bank is able to lend the commercial bank sufficient funds to avoid the bank running short. This is a very important function as it helps maintain confidence in the banking system. If a bank ran out of money, people would lose confidence and want to withdraw their money from the bank. Having a lender of last resort means that we don’t expect a liquidity crisis with our banks, therefore people have high confidence in keeping our savings in banks. For example, the US Federal Reserve was created in 1907 after a bank panic was averted by intervention from J.P.Morgan; this led to the creation of a Central Bank who would have this function.
- Lender of Last Resort to Government. Government borrowing is financed by selling bonds on the open market. There may be some months where the government fails to sell sufficient bonds and so has a shortfall. This would cause panic amongst bond investors and they would be more likely to sell their government bonds and demand higher interest rates. However, if the Bank of England intervene and buy some government bonds then they can avoid these ‘liquidity shortages’. This gives bond investors more confidence and helps the government to borrow at lower interest rates.