In an elegantly crafted article Robin Harding holds that central banks had no alternative for the policies they conducted over the last decades (“Rage against central banks is misdirected”, July 29). We disagree.
The author’s argument is built around the academic notion of the natural rate of interest. That concept has not proven to be a worthwhile operational concept for central banks as has amply been revealed by the outrageous growth of debt over the last three decades when the financial system was made continuously more fragile. A huge price will be paid for these follies: a strong and long-lasting impairment of growth. The resulting very low and negative interest rates symbolise the destructive nature of the policies that have been conducted. It’s economics turned upside down as has also been argued by central banker Jacques de Larosière in the Financial Times’ issue of July 21.
The aim of central banks should be to help make for sustainable growth over the longer run. That means that maximal short-term growth should regularly be foregone. Whenever CPI inflation, debt or asset inflation – all usually self-sustaining and long-term damaging processes unless countered - is judged to run too high, central banks should start to gently applying the brakes, that is raising interest rates and lessening the rate of monetary growth and credit, and this until the excess has sufficiently eased, even if this involves a lessening of growth or a small crisis. This to avoid long-term harm.
The intolerance of small crises has made for successively larger crises, with a most probably lower to much lower long-term growth.
Hyman Minsky was far ahead of his time when in his 1986 book “Stabilising an Unstable Economy” he described how the US financial system with the central bank at its head was gradually made more fragile. Also in 1986 Paul Volcker argued before a Congressional Committee that “… credit creation is constructive only to the extent that the obligations are manageable in relation to income.“ Even then he doubted that such was always the case.
To contend that central banks had no alternative for the policies they conducted doesn’t hold water.
Dr. Frank Boll
This letter was published in the Financial Times of 4 August 2020