Friday, February 19, 2016

Central Banks Need to Speak Up?

One of our goals here is to present multiple points of view so that readers can evaluate them over time and decide which view seems to be more accurate. Right now there is  big difference of opinion on whether or not the market volatility we have seen so far this year is the start of the kind of new major financial crisis that could lead to substantial monetary system change. In an earlier blog post we recapped several different views on this

Today we have an example of a recent mainstream financial article appearing on CNBC expressing the view that the recent volatility is being over hyped and does not indicate a new crisis is on the horizon any time soon. Below are a few quotes and then some added comments.


"After months of intensifying attacks on its policies, and steadily tanking equity markets, the best the Fed found to say last week was "don't blame us, blame China and the weakening energy prices."
Needlessly on the defensive, the Fed apparently could not find anything to reassure the markets with facts about the true state of the U.S. economy. So, here are some ideas.
How about telling the world that, with a growth rate of 2.4 percent for the second consecutive year, the U.S. economy is currently operating almost an entire percentage point above its long-term potential, delineated by the available labor and (physical) capital resources?"            . . . . .
"The Fed's bad-news arguments are exactly those used by "head-for-the-hills" doomsayers masquerading as sophisticated investment analysts. That is unfortunate. It is a great pity indeed that the Fed could not get itself to use solid underpinnings to the U.S. economic growth to tell frightened investors that the economy was not lying down and waiting to die.
Jobs, incomes and credit costs – the variables that directly drive three-quarters of the U.S. economy – have rarely been more supportive of demand and output."
. . . . .
"Oh, but I hear doomsayers screaming that all these good U.S. numbers mean nothing because our whole financial system – and indeed that in the rest of the world - is allegedly crumbling under an advancing avalanche of unmanageable debt.
The Fed – a lender of last resort - should speak to that because that is a vicious attack on its core responsibility: The systemic safety and soundness of the American financial services industry."   
. . . . . . .
"Tumbling equity prices could be regarded as markets' typical overreactions in an otherwise normal asset re-pricing process to reflect a subdued growth of the world economy.
The Fed, the ECB and the PBOC may not need any particular response to that. But they do have to speak up about the current growth trends and reassure the markets that their economies are not – as some market-movers claim – in an irretrievable tailspin. They also have to explain to investors that they have all the instruments they need to support demand, output and employment.
There, however, is one issue where there can be no equivocation: These central banks must speak up forcefully when challenged on the safety and the integrity of the financial systems they manage. That is the key part of their public policy mandate. The safety and the soundness of the financial system should be like the proverbial Caesar's wife – beyond any suspicion."
My added comments: Clearly this article sees no serious crisis coming any time soon. The critics of the central banks see things quite differently and either believe the crisis is already underway or will be sometime this year.
I don't know who will turn out to be right. Readers can follow events and judge for themselves. One note of interest is that I found the article posted above after I had written this blog article suggesting that monetary officials should be more proactive in taking the legitimate concerns of the public seriously and explaining how they plan to address those concerns. The author of this article (Dr. Michael Ivanovitch) pretty much says the same thing. Former Dallas Fed President Robert McTeer also had similar comments in this recent CNBC article.

I'll add that instead of speaking up forcefully to inspire confidence in the current system, we have monetary officials calling for elimination of cash, negative interest rates and breaking up big banks to "avoid a potential meltdown." Lots of people are watching to see where all this is going, if anywhere.

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