Letter: Central bank policy turns economics upside down – Financial Times

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).

But his 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 that 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.

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 gently applying the breaks, that is raising interest rates and lessening the rate of monetary growth and credit, and do 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 for 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.

Frank Boll
Rotselaar, Belgium

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