King is aware that monetary policy has been used to provide short-term gains at the cost of long-term pain – what he calls the “paradox of policy”. Despite extremely low rates, the global economy remains out of kilter. It’s a pity that King never considers Friedrich Hayek’s early work which suggests that economies become unbalanced when central bankers impose an inappropriate interest rate. But as King buys into the “savings glut” story, he doesn’t believe that monetary policymakers are to blame. For the man in charge of the Bank of England when UK bank Northern Rock went down, this is a convenient if not quite satisfactory conclusion.
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Samizdata quote of the dayPerry de Havilland (Wiltshire) · Economics, Business & Globalization · Slogans & Quotations · UK affairs April 11th, 2016 |
 6 comments to Samizdata quote of the day |
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“…that monetary policy has been used to provide short-term gains at the cost of long-term pain..”
So, the “big pharma”/ Health industrial complex model then?
The government, directly or indirectly, screwing with the price of money is yet another example of government price fixing, which is perhaps the best definition of socialism.
“Prior to 2008, low rates encouraged households to bring forward future spending, inflated asset prices, incentivized leverage, resulted in risk taking (the “search for yield”) and led to bad investments.”
True enough, but why the qualifier? It’s still true today, well after 2008. Indeed, the continuation of ZIRP is clearly designed to inflate asset prices, to create and maintain as many asset bubbles as possible. Even after all these years King still doesn’t get it. He’s still trying to deflect blame from himself and his cronies.
What happens when the asset bubbles pop in a ZIRP environment? How far can they go into negative territory before people throw up their hands and resort to barter?
The gentleman should be delighted.
Real savings have now been crushed – even in Japan (it has taken many years to destroy saving in Japan – but the demented line of policy has finally done it).
No more “savings glut”.
Now lets see how this works out…..
As for the Central Banks not setting the correct interest rate.
They should not be setting interest rates at all.
In fact – Central Banks should not exist.
“But what if commercial banks get into trouble – Walter Bagehot said…”
Bleep Walter Bagehot.
And if commercial banks do not want to “get into trouble” perhaps they should avoid creating Credit Bubbles.
If they insist on creating Credit Bubbles – then let them go bust (when the bubbles burst).
Yes – there will be terrible consequences of letting the banks go.
But it has to happen sometime.
Japan has been keeping the banks going since 1989 but they never “get better”.
They do not “get better” because they are dead.
The are dead banks walking around – doing strange things.
Yes…..
Zombie banks.
Eric asks, “What happens when the asset bubbles pop in a ZIRP environment?” That’s a great question, and probably deserves its own discussion thread. But the short answer is that nobody knows; we’re in completely uncharted territory here, with the entire world (for the first time in human history) on an interconnected fiat money system. My suspicion is that we will see a massive collapse in nominal asset values, with the prices of stocks and land reverting to something approaching their intrinsic value (and, as a side effect which I believe would be salutary, the evaporation of much of the outstanding money stock created by fractional-reserve lending and central bank financing of worthless “assets” such as Greek bonds). But we’ll just have to wait and see.
Paul, not to worry. There is still enough sturm und drang among mainstream economists about “excessive” saving in China to keep King, Krugman, Yellen and all the other Keynesians happy (and to lend a faux credence to protectionists’ fantasies).
But I agree with you about Bagehot.