{"id":56208,"date":"2016-09-22T02:00:00","date_gmt":"2016-09-22T00:00:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/central-banks-and-the-definition-of-insanity\/"},"modified":"2016-09-22T02:00:00","modified_gmt":"2016-09-22T00:00:00","slug":"central-banks-and-the-definition-of-insanity","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/central-banks-and-the-definition-of-insanity\/","title":{"rendered":"Central Banks and the Definition of Insanity"},"content":{"rendered":"

Since the depths of the financial crisis in 2008, global monetary policymakers have pulled out all the
\nstops to stave off disaster. These have included lower rates \/ zero rates \/ negative rates, forward
\nguidance, Operation Twist, quantitative easing, funding for lending schemes, and now the possibility of
\n\u201chelicopter money.<\/em>\u201d<\/p>\n

To be sure, central banks should be applauded for their creative thinking and flexible use of monetary
\npolicy tools when the global economy went on life support. While impossible to prove, it could certainly
\nhave been worse had they not acted so decisively. Whether it was the Bank of Japan\u2019s \u201ckitchen sink<\/em>\u201d
\napproach, Mario Draghi\u2019s \u201cwhatever it takes,<\/em>\u201d or the Federal Reserve\u2019s \u201copen mouth<\/em>\u201d policy, those
\nextraordinary actions sent a strong message. A message that was powerful enough to change sentiment
\nat a time when it was sorely needed.<\/p>\n

What Comes After \u201cExtraordinary\u201d?<\/strong><\/p>\n

Today however, that same message may be doing more harm than good. Although sub-par, the global
\nrecovery\/expansion is entering its eighth year. In this environment, extraordinary monetary policy
\nseems disconnected from a world that is growing slowly but is hardly in crisis. <\/p>\n

Consumers and
\nbusinesses may not understand the technical nuances of negative rates or helicopter money, but they
\nrecognize that extreme policies could only be justified by an extremely dire outlook.<\/quote><\/p>\n

This disconnect
\ndoesn\u2019t send consumers to the mall or encourage CEOs to invest in capital projects. After eight years,
\npolicies that once boosted confidence are now undermining it \u2013 diluting or possibly offsetting the very
\nbenefits that low rates were designed to deliver.<\/p>\n

The Side Effects<\/strong><\/p>\n

If extraordinary policy is now undermining confidence, is it time for a change? Normalizing monetary
\npolicy obviously comes with its own risks: Raising interest rates or unwinding asset purchases could
\nfurther slow the global economy and maybe even cause the next recession. While we acknowledge this
\nrisk, we believe central banks have reached a tipping point where the negative side effects of
\nextraordinary policy now seem to outweigh its ever-diminishing benefits. These side effects include:<\/p>\n

1) A greater likelihood of asset bubbles<\/p>\n

2) Increasing liabilities and balance sheet pressures for banks, insurance companies, and
\npension funds<\/p>\n

3) A greater tendency for individuals to save more to compensate for lower yields<\/p>\n

4) Less interest income for the sizable Baby Boom generation to spend<\/p>\n

5) The loss of competitiveness and efficiency as unnaturally low rates enable zombie
\ncompanies to stay alive indefinitely<\/p>\n

6) A convenient excuse for other policymakers to shirk their responsibilities to implement
\nstructural reforms and provide fiscal stimulus<\/p>\n

To be clear, no one is calling for aggressive tightening of monetary conditions, just a move away from
\nDEFCON 1, the ultra-accommodative policies that have done little to bolster growth in recent years. It is
\nalso important to realize that not all central banks are facing the same trade-offs. Various countries and
\nregions are at different points in the cycle, so each will have to decide how to weigh the knock-on
\neffects. In the U.S., however, modestly stronger growth and inflation allow the Fed greater policy
\nlatitude than many other central banks. While the Federal Open Market Committee is unlikely to hike
\nthis week, the meeting provides an important opportunity to convey a more confidence-inspiring exit
\nstrategy.<\/p>\n","protected":false},"excerpt":{"rendered":"

It is often said that that the definition of insanity is doing the same thing over and over and expecting a different result. This appears to be a lesson that central bankers have been unable \u2013 or unwilling \u2013 to grasp.<\/p>\n","protected":false},"author":1,"featured_media":56206,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1655,1671,1943,1651,1437,2087,1677],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/56208"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=56208"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/56208\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/56206"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=56208"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=56208"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=56208"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}