October 14, 2012

It's now official - Central Banks are not working to save the economy

Long time readers of this blog will recall that I predict that the era of Central Banking is now over. We are now in the process of watching the Central Banks destroy their legacy from within. Here is more evidence:

A review of evidence into Quantitative Easing (QE) has shown that the Government's hope that it will pull the UK out of recession may be unfounded.

Professor Chris Martin, from the University of Bath's Department of Economics, has looked at the impact of QE not just on financial markets but also the 'real' economy of jobs, inflation and output and concluded that there is no lasting benefit in continuing to pursue the policy.

He concludes that QE has produced a limited but temporary gain for the financial sector, but it has been of no help to the wider business community or individuals and families struggling against inflation and unemployment.

His review has looked at studies of the performance of QE by central banks, including numerous historical studies of small scale QE purchases and studies of the large contemporary QE programmes.

Now, it may be that the Central Banks find themselves convinced of having to prop up the financial sector, in order to save the rest of industry. But this logic doesn't impress for very long because (a) they are only succeeding in undermining the financial sector, rather than making banks more robust for the future, and (b) the populace isn't comfortable with paying the price of this worsening.

Realpolitik will reassert itself. As more time goes on, and more trouble is stored for the future, the potential for massive systemic failure increases. And it is the Central Banks themselves that are driving that systemic risk higher and higher, so they necessarily have to pay the cost when it comes around.

Still, the problem with predicting that the Central Banks are diligently removing themselves from the game is that we do not know what happens next. The end of the century of Central Banking is then a prediction of only small value. The far better question is what arises to re-structure finance in the future?

Food for thought from Chris Cook.

Posted by iang at October 14, 2012 04:38 AM | TrackBack
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