Saturday, August 13, 2016

How Central Banks Cause Financial Crises

The leaders of the world's largest central banks don't seem overly alarmed by the risks that unconventional monetary policy poses.
Janet Yellen, in a speech at the Economic Club of New York in March, assured investors that the Fed could, if necessary, "put additional downward pressure on long-term interest rates and so support the economy" by using "forward guidance about the future path of the federal funds rate and increases in the size or duration of our holdings of long-term securities."
She minimized the risks by noting: "While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed."
That hubris extends to other central bankers who have faith that accommodative policies can stimulate the real economy with little risk of asset bubbles or increased financial volatility. The reality is that policies aimed at lowering long-run interest rates by large-scale purchases of government and corporate bonds pose significant risks and have done little to increase real GDP growth or private investment.
The desired wealth effect is, in fact, a pseudo wealth effect that will disappear when rates rise.

http://www.investors.com/politics/commentary/how-central-banks-cause-financial-crises/ 

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