It is a fallacy to assume that there is a simple solution to the flaws in our financial and financial systems.
So who or what is to blame? Why, 15 years after the start of the last financial crisis, do we want to see another? Many, many people are to blame for the ultra-low interest rates imposed by central banks for a long time. To others, from the worship of the associates. You don’t have to look far to find the intellectual origins of such beliefs. They are in the Austrian economy. As Brad DeLong says in his excellent book, the saying is “the market gives, the market takes;” Let it be the name of the market”. The Austrians are not so bad. But not by law either.
The main argument is that the transatlantic financial crisis of 2007-15 was caused by monetary policy that was too easy. From there, and increased by the police, they thwarted the creative destruction that brought the economy back to a healthy state. Finally, after covid, another outbreak of too easy money, combined with an aggressive fiscal policy, led to inflation and more fragility of the economy. But we all suffer the consequences.
Let’s start with the time before the financial crisis. Index-linked government bonds issued in the UK in the early 1980s. Its most notable moment is the huge drop in real from the peak of 5 percent in 1992 to 1.2 percent in 2006, minus 1.4 percent in 2013. and minus 3.4 percent. 2021. Only the central banks, as crazy as they were, refused to decline more than eight percentage points in rates in three decades.
If this huge drop in real interest rates matched the needs of the economy, it would have been reflected in inflation.
So what happened? The fundamental changes were economic liberalization, globalization and China’s entry into the global economy. These last two not only reduced inflation, but also brought the country with a colossal surplus of savings. In addition, the increased inequality of the nation’s high incomes, combined with the aging of the population, has created a surplus of savings, especially in Germany. To match supply and demand, there was a need for exceptional credit-driven investment, especially in housing. For better or worse, financial liberalization facilitated that boom.
Everything came to a head in the financial crisis, then the plan was not to have another great depression. I don’t regret having agreed, I felt it clearly. However, given the conditions of the global economy and the impact of the crisis, continued fiscal support or an ultra-resolved monetary policy was needed. The first ruled. It had to be him.
Like all human institutions, central banks are imperfect and sometimes incompetent. but they are not mad. I think the financial excuse is mainly for paying for what has gone wrong in the economy in recent decades. Things wouldn’t be surprising if the central banks stayed. We cannot abolish democratic politics and economics to fit our world, not the 19th century.
