Central banking goes bananas

As a former central banker I am deeply concerned that my colleagues from other central banks are about to make very serious policy mistake. Last week Fed, ECB and BoE confirmed their easy credit policy by declaring that it will be maintained for the extended period of time. Major newspapers hailed this approach (FT, The Economist). There appears to be a new consensus, central bankers should support growth until private sector demand recovers and strong growth returns. Many commentators state that central bankers should also help governments to reduce fiscal deficits by keeping interest rates low.

This is a very dangerous consensus. While central banks role was crucial to prevent 1930s style depression, now, when the risk was avoided central bankers should return to their primary role, securing price stability and financial stability. However their recent decisions are focused on growth at the price of creating financial instability. Pumping up more money and creating asset bubbles (as shown on major stock markets) will support growth in the short run, but create instability in the long run.

Alan Greenspan was right. The age of turbulence has arrived, and central bankers mistakes will be key driving force behind it.


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