Questions and criticisms are beginning to mount against Central Bank ‘bubble-blowing’ policies that have done little to underpin legitimate economic growth prospects and promote long-term stability
ZeroHedge, Aug 27, 2019 – Excerpts:
In recent weeks we have seen a surprising spike in criticism of central banks by establishment figures, in some cases central bankers themselves, most notably Mark Carney who last Friday remarkably admitted that very low interest rates tend “to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime.” This continued yesterday when 7 months after it praised negative rates, the San Francisco Fed pulled a U-turn and warned that the “Japanese experience”, where negative rates dragged down inflation expectations even more, is ground for NIRP caution.
Then, in an even more bizarre interview with the FT, St Louis Fed president James Bullard made an even more stunning admission – that the Fed no longer has any idea what is going on. To wit:
“Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing… We just have to stop thinking that next year things are going to be normal.”
There was more. In a series of questions aimed at the Fed in this post-Jackson Hole powerless reality, we brought you some rhetorical fireworks from the head of FX at Deutsche Bank, Alan Ruskin, who lashed out at the central bank with 20 questions, technically statements, that 10 years ago would have branded him a tinfoil-wearing conspiracy theorist (we know, because we asked just these questions back in 2009), among which:
- “Will the Fed/ECB buy equities/ETFs? How far are central banks willing to distort underlying value, or is distorting value intrinsic to Central Banking as per the Austrian critique?”
- “How much are Central Banks going to be complicit in a collapse in fiscal standards, by buying public sector assets? Will a passive Central bank simply accommodate and facilitate fiscal actions related to MMT?”
- “Are we reaching a natural end to the secular decline in inflation and rates that has propelled the asset cycle in the last 40 years. Has asset inflation hidden an even more meaningful deceleration in the natural rate of growth that will evident in the next decade?”
- “Is it the Central Banks job to do away with business cycle? And at what price? Are we witnessing the great moderation interspersed with a great collapse in confidence and wilder big credit cycle, and greater long-term misallocation of resources?”
- “The Fed did a particularly good job hitting its inflation target in the years before the Great Financial collapse in 2008 – what does that say about inflation targeting creating stability?”
Tying it all together was Bank of America, which in a report meant to recommend buying gold, lashed out at the Fed, warning that “ultra-easy monetary policies have led to distortions across various asset classes”; worse – and these are not our words, but of Bank of America – “it also stopped normal economic adjustment/ renewal mechanisms by for instance sustaining economic participants that would normally have gone out of business”, i.e. a record number of zombie corporations. In addition, as everyone knows, debt levels have continued to increase, making it more difficult for central banks to normalize monetary policy as 2018 showed so vividly (and for Powell, painfully).
Which brought us to BofA’s conclusion:
“We fear that this dynamic could ultimately lead to “quantitative failure”, under which markets refocus on those elevated liabilities and the lack of global growth, which would in all likelihood lead to a material increase in volatility.”
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Central Banks need a dynamic new plan.
The U.S. Federal Reserve needs a new plan – one which ‘re-targets’ liquidity flows into ‘ground-level’ channels where they will generate the most power and precision.
During the last financial crisis, the Fed created various ‘credit facilities’ to ‘secretly funnel hundreds of billions of dollars dozens of major financial institutions to ‘float’ them up out of their capital holes. Bank of America was the #3 recipient of the Fed’s “secret liquidity lifelines”:
Bloomberg Nov 28, 2011: “Bank of America Corp., which got two rounds of U.S. Treasury Department capital injections totaling $45 billion to stay afloat during the credit crisis, borrowed twice that amount in secret from the Federal Reserve. On Feb. 26, 2009, the Charlotte, North Carolina-based bank held $78 billion of loans from the Fed’s Term Auction Facility, $8.65 billion from the Primary Dealer Credit Facility, $4.75 billion from the Term Securities Lending Facility. The financing helped bolster the largest U.S. bank by assets as investors worried its 2008 acquisitions of Merrill Lynch & Co. and Countrywide Financial Corp. might lead to nationalization.”
It is time now for the Fed to create a new “Citizens Credit Facility,” to grant U.S. citizens the same direct access to liquidity that was provided to the likes of BofA, Goldman Sachs, Société Générale, Deutshe Bank, Morgan Stanley… and numerous others.
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