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The Failure of Central
Banking
The recent chain of events is not an isolated development. In fact, for
the second time in seven years, the bursting of a major asset bubble
has inflicted great damage on world financial markets. In both cases -
the equity bubble in 2000 and the credit bubble in 2007 - central banks
were asleep at the switch. The lack of monetary discipline has become a
hallmark of an unfettered globalization. Central banks have failed to
provide a stable underpinning to world financial markets and to an
increasingly asset-dependent global economy.
 This sorry state of affairs can be traced to
developments that all started a decade ago. Basking in the warm glow of
a successful battle against inflation, central banks decided that easy
money was the world's just reward.
America's IT-enabled productivity resurgence in the late 1990s was the
siren song for the Greenspan-led Federal Reserve - convincing the US
central bank that it need not stand in the way of either rapid economic
growth or excess liquidity creation. In retrospect, that was the
"original sin" of bubble-world - a Fed that condoned the equity bubble
of the late 1990s and the asset-dependent US economy it spawned. That
set in motion a chain of events that has allowed one bubble to beget
another - from equities to housing to credit.
Yet bubbles always burst. And when that happened to the equity bubble
in 2000, central banks threw all caution to the wind and injected
massive liquidity into world financial markets in order to avoid a
dangerous deflation. With globalization restraining inflation and real
economies recovering only sluggishly in the early 2000s, that excess
liquidity went directly into asset markets.
Aided and abetted by the explosion of new financial instruments -
especially what is now over $440 trillion of derivatives worldwide -
the world embraced a new culture of debt and leverage. Yield-hungry
investors, fixated on the retirement imperatives of aging households,
acted as if they had nothing to fear. Risk was not a concern in an era
of open-ended monetary accommodation cushioned by a profusion of
derivativesbased shock absorbers.
 As
always, the cycle of risk and greed went to excess. Just as dot-com was
the canary in the coalmine seven years ago, subprime was the warning
shot this time. Denial in both cases has eerie similarities - as do the
spillovers that inevitably occur when major asset bubbles pop. When the
dot-com bubble burst in early 2000, the optimists said not to worry -
after all, Internet stocks accounted for only about 6% of total US
equity market capitalization at the end of 1999. Unfortunately, the
broad S&P 500 index tumbled some 49% over the ensuing two and a
half years and an over-extended Corporate America led the US and global
economy into recession. Similarly, today's optimists are preaching the
same gospel: Why worry, they say, if subprime is only about 14% of
total US securitized mortgage debt? Yet the unwinding of the far
broader credit cycle, to say nothing of the extraordinary freezing up
of key short-term financing markets, gives good reason to worry -
especially for over-extended American consumers and a still US-centric
global economy.
Central banks have now been forced into making emergency liquidity
injections - including a rare intra-meeting cut in the Fed's discount
rate that was then followed by a 50 basis point reduction in the
overnight lending rate. The jury is out on whether these efforts will
succeed in stemming the current rout in still overvalued credit
markets. While tactically expedient, these actions may be strategically
flawed in that they fail to address the moral hazard dilemma that
continues to underpin asset-dependent economies. Is this any way to run
a modern-day world economy?
The answer is an unequivocal "no." As always, politicians are quick to
grandstand and blame financial fiduciaries for problems afflicting
uneducated, unqualified borrowers. Yet the markets are being painfully
effective in punishing these parties. Instead, the body politic needs
to take a look in the mirror - especially at the behavior of its
policy-making proxies and regulators, the world's major central banks.
It is high time for monetary authorities to adopt new procedures -
namely, taking the state of asset markets into explicit consideration
when framing policy options. Like it or not, we now live in an
asset-dependent world. As the increasing prevalence of bubbles
indicates, a failure to recognize the interplay between the state of
asset markets and the real economy is an egregious policy error.
 That
doesn't mean central banks should target asset markets. It does mean,
however, that they need to break their one dimensional fixation on
CPI-based inflation and also pay careful consideration to the extremes
of asset values. This is not that difficult a task. When equity markets
go to excess and distort asset-dependent economies as they did in the
late 1990s, central banks should run tighter monetary policies than a
narrow inflation target would dictate. Similarly, when housing markets
go to excess, when subprime borrowers join the fray, or when corporate
credit becomes freely available at ridiculously low "spreads," central
banks should lean against the wind. The current financial crisis is a
wake-up call for modern-day central banking. The world can't afford to
keep lurching from one bubble to another. The cost of neglect is an
ever-mounting systemic risk that could pose a grave threat to an
increasingly integrated global economy. It could also spur the
imprudent intervention of politicians, undermining the all-important
political independence of central banks. The art and science of central
banking is in desperate need of a major overhaul.
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Overview of
this
Inflation Page:
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What do
American experts think about the Credit
Crunsh ?
by
Christopher Laird PrudentSquirrel.com Feb 22, 2007
By William Pesek Jr.Published: June
12th , 2006
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Very Recommended
Reading :
 From both an
economic and monetary perspective, the United States is a house of
cards—impressive on the outside, but a disaster
waiting to happen
beneath the surface. In a relatively short period of time, the country
has gone from the world's largest creditor to its greatest debtor; the
value of the dollar has declined; and domestic manufacturing has given
way to non-exportable services. While these and other issues could
potentially spell disaster for your financial well-being, the situation
could also present unique opportunities—if you're prepared. Now, in Crash Proof, Schiff
provides you with an insightful examination of the structural
weaknesses underlying this impending economic meltdown, and discusses
the measures you can take to protect yourself—as well as profit—during
the difficult times that lie ahead. He also outlines a specific
three-step plan that will allow you to preserve wealth and protect the
purchasing power of the savings you have worked a lifetime to
accumulate.
by Peter D. Schiff
Recorded
at the Austrian
Economics and Financial Markets conference
at The Venetian Hotel Resort
Casino, Las Vegas, 02-18-2005
A 20 minutes
podcast (mp3) explaining the inconsistencies of
fiat money
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The Economics of Fiat Money ( Free Downloads of books and
audio )
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I.
Introduction by Murray Rothbard
II. Money in a Free Society
1.
The Value of Exchange
 2. Barter
3.
Indirect Exchange
4. Benefits of Money
5.
The Monetary Unit
6.
The Shape of Money
7.
Private Coinage
8.
The Proper Supply of Money
9.
The Problem of Hoarding
10.
Stabilize the Price Level?
11.
Coexisting Moneys
12.
Money-Warehouses
13.
Summary
III. Government Meddling With Money
1.
The Revenue of Government
2.
The Economic Effects of Inflation
3.
Compulsory Monopoly of the Mint
4.
Debasement
5.
Gresham's Law and Coinage
6.
Summary: Government and Coinage
7.
Permitting Banks to Refuse Payment
8.
Central Banking: Removing the Checks on Inflation
9.
Central Banking: Directing the Inflation
10.
Going Off the Gold Standard
11.
Fiat Money and the Gold Problem
12.
Fiat Money and Gresham's Law
13.
Government and Money
IV. The
Monetary Breakdown of the West
1. Phase I: The
Classical Gold Standard, 1815-1914
2. Phase II:
World War I and After
3. Phase III:
The Gold Exchange Standard (Britain and the United States) 1926-1931
4. Phase IV:
Fluctuating Fiat Currencies, 1931-1945...
5. Phase V:
Bretton Woods and the New Gold Exchange Standard (U.S.) 1945 1968
6. Phase VI: The
Unraveling of Bretton Woods, 1968-1971
7. Phase VII:
The End of Bretton Woods: Fluctuating Fiat Currencies, Aug-Dec, 1971
8. Phase VIII:
The Smithsonian Agreement, December 1971-February 1973
9. Phase IX:
Fluctuating Fiat Currencies, March 1973-? |
Copyright 1980 by
The Ludwig von Mises Institute
Download
the full
text free here
in PDF,
in .PDB, or
in .LIT
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