"The principle of central-bank independence, a mainstay of economic orthodoxy for two decades, has taken a battering over the past week. Investors should be on their guard. ... Allowing central banks freedom to set interest rates without political interference is the best way to anchor inflation expectations, reducing borrowing costs and deliver faster growth. ... But independence also allows central banks huge power with limited accountabilty. ... The ECB's decision to start buying goverment debt is even more troubling. it says it is responding to dysfunctional' bond markets. How does it know high goverment borrowing costs reflect liquidity problems rather than legitimate solvency fears that will expose the central bank to losses? ... Might its decision to buy bonds increase moral hazard, removing the incentive for governments to tackle their deficits?," my emphasis, Simon Nixon at the WSJ, 14 May 2010, link:
Of course that's the intent: to enable deficit spending! What principle? Independent of who? I have another way to "anchor inflation expectations": gold. My more basic question: "high borrowing costs", as Henny Youngman would ask, "compared to who"?
2 comments:
Central bankers have a pretty big bag of tricks but they're running out of options. And they've dug themselves into a hole.
Independent? HA! Central bankers are the ultimate political animals... so many constituencies to oversee...
High borrowing costs? It's all been pretty tame since Volcker chaired the Fed...
Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.
Most advanced economies are experiencing a “subdued” recovery, Shinohara said in remarks prepared for delivery in Singapore today. “A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”
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