Central banks killing capitalism
Central banks killing capitalism

The central banks are distorting markets and maintaining artificially high asset prices. Apparently this is for our own good. Heaven forbid the prudent amongst us should purchase assets from the imprudent at prices which enable us to service any loans required for the purchase, while making a profit:

Dear EBA, the central banks and emerging markets have got this: The extension of central bank liquidity eased the pace of asset-shedding observed in late 2011, but did not turn the underlying trend. If the banks in the EBA sample, for instance, failed to roll over their senior unsecured debt maturing over a two-year horizon, which amounts to more than €1,100 billion (€600 billion among banks with a capital shortfall), they would have to shed funded assets in equal measure. By covering these funding needs, the LTROs and dollar swap lines helped avert an accelerated deleveraging process. But many banks continued to divest assets in anticipation of the eventual expiration of these facilities. Banks are also mindful that a sustained increase in their capitalisation would facilitate both regulatory compliance and future access to the senior unsecured debt market. The BIS paper available here.

Any surprise the banks are not lending money? There is a shortage of demand from those they believe will be able to repay it. The shortage will remain until such time as asset prices fall to a level reflective of their value or their profit generating capacity rises to better reflect their price. Central bank and other government measures stopping defaults and declining asset values are stopping this from happening.

The economics literature is stuffed full of material on the detrimental effects of sticky prices. For example, how inflexible labour markets slow an economy and increase unemployment. Exactly the same phenomena is observed with sticky inflexible asset prices. They slow an economy and result in unemployed assets and hence labour. It beggars belief that a bunch of central bankers so in thrall to the nostrums of mainstream economics are not across this possibility. At least it would be if we did not have documented evidence of how out of touch they are.

Timing can make all the difference in life. Maintaining real wages with job security can initially seem to mitigate any downturn. Those employed continue to earn a good income, they maintain demand and asset prices. Over time the rigid economy develops an insider/outsider phenomena and may come to resemble the British economy prior to Thatcher.  It becomes sclerotic and does not engender much growth or increase in living standards.The rigidities and distortions caused by government interventions “for the good of the people” cause ever more crises.  The government in turn intervenes to mitigate these effects – a nationalization here, a price control there, a regulatory barrier somewhere else. Before you know it there are zombies everywhere. High unemployment and low or negative income growth are the norm.

Meanwhile the economy with a more flexible labour market may initially plunge faster and further. But eventually assets become bargains, then they become better than bargains. They get snapped up and put to work, growing the economy and wages from a firm less leveraged foundation. Before too long the country with the more flexible economy is outperforming the one rife with sticky prices and government interventions. People are employed and their real incomes rising.

The problems in the economy subject to central bank and other government initiatives to induce price rigidity are inevitable. Also inevitable is the pain and suffering inflicted on many of the least able in society as described here. While penalizing many of those in most need, central bank measures also penalizes those holding the cultural values most amenable to wealth generating capitalism. The bourgeois middle class. If ever there were grounds for abolishing the Fed and other central banks, it is their susceptibility to these sorts of policies. If they keep it up much longer, it may not just be their jobs at stake.



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