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Central Banks Can Save The World

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Central banks made a hash of things in the 2000s. But their failures – the credit bubble and the 2007 financial crash – have too many precedents.

There was the unexpectedly high inflation in the 1960s and 1970s. And two generations earlier, central bank activity and inactivity bore much of the responsibility for the boom of the 1920s, the great bust of the 1930s and quite possibly the United States’ fall back into recession in 1937.

Something has been fundamentally wrong with monetary policy. The central banks’ weakness is especially glaring when set against the ability of most parts of the economy to get over their serious problems. For example air and water pollution, widely considered existential threats, have been tamed thanks to the advance of technology, the widening of corporate agendas, and the dynamic efforts of governments and lobby groups.


First, central bankers should recognise that price stability is at least as valuable for financial assets as for consumer goods. Raging stock markets encourage greed more than investment. They invite subsequent crashes and recessions. House price bubbles distort the behaviour of both buyers and builders. Sharp moves in commodities wreak havoc on producers and users alike. Unsteady interest rates can eventually lead to unsteady economic activity.


But there is a problem, even if the successors of Janet Yellen at the U.S. Federal Reserve and Mario Draghi at the European Central Bank firmly believe they should push financial markets around. The current toolkit is nowhere near powerful enough. Policy interest rates are a blunt instrument –interest rates that are high enough to slow down financial markets will also crush economies. But the current techniques of financial regulation are not very ambitious.

The toolkit is the subject of the second revolution. Central bankers should take more control over money creation. The process is too important to be entrusted almost entirely to banks.

That is the current practice – bank loans create cash deposits. It often works reasonably well, but bankers in greedy mode create too much money, burdening the economy with leverage while fuelling speculation and inflation of asset or goods prices. In their fearful mode, bankers withdraw credit and deposits, starving the economy of useful funds.

Central banks need to get a grip, with the help of money-issuing governments. Most new money should be created directly by fiat, not by lending. Regulation of banks should be intensive, actively guided by economic principles. Loans should be limited to productive activities. Lending based on the value of land should be treated as radioactive. Lending which pushes up the value of land or any other financial asset should be taboo.

Well we can all trust the worlds central banks...

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Protect teh HPI.

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