Central Banking Goes Negative

Project Syndicate ^ | 18 Feb, 2016 | STEPHEN S. ROACH

[MtnClimber]

NEW HAVEN - In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates - one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis.

The adoption of negative interest rates - initially launched in Europe in 2014 and now embraced in Japan - represents a major turning point for central banking. Previously, emphasis had been placed on boosting aggregate demand - primarily by lowering the cost of borrowing, but also by spurring wealth effects from appreciating financial assets. But now, by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation - in effect, urging banks to make new loans regardless of the demand for such funds.

[MtnClimber]

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.

[JustTheTruth]

For starters, Central Banks do not “manage their economies.” Central banks exist to provide liquidity to the banking system in times of crisis. That we have allowed them to take on the role of central planners is a travesty. They exist now to steal from the public, empower their big bank owners to steal from the public through currency debasement, and to enable governments to spend like there is no tomorrow (through unlimited borrowing at incredibly low prices.)

Central banks have successfully created a facade that they are about managing the economy and making it better. They are all about the banks; to hell with everyone else unless the banks first benefit. How they have converted a mandate of “price stability” into a 2% annual inflation target - measured by deliberately artificially under-reporting inflation measures - is one of their biggest lies and deceptions and constitutes a hidden wealth tax and tax on savers and pensioners. Central banks are thus at the center of massive crime syndicates masquerading as something good. As huge campaign contributors and secret financial supporters of politicians (insider trading info, anyone?), they have also taken control of the political and regulatory system in this country and there are few willing to even try to corral their ongoing crime spree.

[tbpiper]

I wonder what kind of stories they’re gong to tell us this morning to try to get some life into the market.