Thursday, August 2, 2012

The Epic Failure of Central Banking

The two major central banks of the world demonstrated this week they are fine watching the global economy go over the cliff.  Yesterday, it was the Fed.  Today, it was the ECB's turn.  Their failure to act in the midst of the ongoing crisis amounts to a passive tightening of global monetary policy.  This is because their inaction raises the global demand for safe assets while allowing existing ones to be destroyed.  Since these safe assets effectively act as money, the central banks are worsening the excess money demand problem that underlies the global aggregate demand shortfall.  This passive tightening has been going since mid-2008 and confirms that we are witnessing what Ryan Avent calls the epic failure of central banking.   Future historians will not be kind to these central banks. 

P.S. Michael Darda explains why the ECB's decision today was particularly egregious.
Update: Matthew Yglesias makes a similar point.


  1. It's like the ECB is putting on the pounds but refusing to loosen its belt--passive tightening.

    Hmm. Need better analogy.

  2. take note: now Rosengren also favors open ended QE with a 4.5% nominal income target.

    "Mr. Rosengren said he did not have a firm view on what kind of measuring stick the Fed should use for a new program of asset purchases. But he suggested the Fed could target a minimum rate of nominal growth — economic growth plus inflation — of 4.5 percent."

    thats two Fed members (i also tend to think Williams and Bernanke would support it but have not said so, *as Fed members anyway*).

    we might be closer to the dream Fed statement than you think. IF the FOMC votes for open ended-QE (which seems to be the most likely for the next round), a nominal income target is the most natural economic indicator to target...

  3. dwb, that is good news. Rosengreen is not a voting memeber this year, but his words are hopefully a sign and an encouragement to those waivering on the FOMC.

  4. its a good sign. I wish we had better "conservative" economists on the FOMC. Fisher, for example, has repeatedly stated he does not want to keep rates low because it eliminates the pressure on Congress to pursue sound fiscal policy. Well, duh, he should favor 4.5% nominal income targeting because it makes the public/private spending decisions and CBO budgeting much more transparent. My personal view is that ngdplt is somewhat more consistently "hawkish" (in the sense that it implies a slightly lower long run inflation rate). If FOMC members like Fisher and Plosser were better economists i think they would get it, but i just dont have much respect for them any more, sadly. but what do i know...