Certainly it appears presumptuous for an ordinary economist such as this columnist to criticize central banks’ actions or forecasts.
After all, these organizations have access to all the economic information available and have huge staffs and many economists who can be guides. Nevertheless, central banks’ records leave a lot to be desired. Fresh thinking is overdue.
In the United States Alan Greenspan was chairman of its Federal Reserve Board from 1987 to 2000, and here in Canada the governor of the Bank of Canada was John Crow.
Greenspan was considered a hero during his first term. He always spoke in convoluted terms and was inclined to leave things alone. Inflation gathered momentum and huge price bubbles developed in both housing and stock markets. He stated erroneously that no one could determine if we were in a speculative surge, and that in any event things would be self-correcting. That turned out to be nonsense on all accounts.
Here in Canada we apparently accepted the same disastrous philosophy, much to our regret later.
The record of North American central banks reveals not only faulty judgements, but a pattern lacking inconsistency; ups and downs in interest rates and monetary tightening over short intervals. Still, staggering inflation ensued, causing tremendous long-term harm.
Yet as is widely acknowledged, problems were now building – initially in parts of the economy that spilled over to the banking, housing, and stock and bond markets as well as over-extension in personal indebtedness.
Central banks in North America moved to centre stage in the aftermath of the developing economic crisis. Liquidity (funds) was provided to banks and the automobile sectors, and pushed interest rates to the lowest levels in generations, hovering around one per cent.
By supplying the economy with money printing, asset prices climbed and housing and stock markets soared, the latter by higher valuations on earnings. Too, employment gains rose.
However, by logic these additions should not have occurred. They ended by rewarding short-term risk takers and punishing the real investors. People purchased the most speculative vehicles and prevented long-term investments from taking place. That is a recipe for trouble; any “success” is self-conceit.
For the time being, naysayers such as this columnist were considered to be completely incorrect. Yet, the final results are not available. The distortions and unwinding of these manoeuvres must lead to a day of reckoning.
We now are on a risky path with trouble ahead.
Any objective observer would state central banks provide no better vision of the future than a reader of tea leaves.