The heretic in Basel: The case against maxing out monetary policy

Posted: June 29, 2014 in economy
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CENTRAL banks in the developed world continue to keep monetary policy as loose as possible for as long as possible in order to facilitate a stronger recovery from the painfully weak upturn after the financial crisis and the “great recession”. America’s Federal Reserve may be phasing out its programme of asset purchases but it is determined to delay any rise in interest rates. The Bank of England is closer to a rate increase, but to the extent that any clear message can be deciphered from its confused communications such a move may still be some time off even though the base rate has been at a three-centuries low for over five years. In Japan quantitative easing carries on apace. And in the euro area the European Central Bank (ECB) has become the first big central bank to introduce negative interest rates and will lend funds to banks at rock-bottom rates fixed for as long as four years in a bid to ease credit conditions for firms in southern Europe.The new monetary-policy orthodoxy bears a disconcerting resemblance to someone maxing out their credit card but its proponents have an array of respectable arguments to justify their loose stance, such as continuing reserves of spare capacity in most advanced economies and surprisingly weak inflation. In the euro area, high levels of private as well as public indebtedness warrant measures to minimise the risk of a lurch into …

via Economic Crisis


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