October 20, 2017

We sure have a major problem with central bankers that seemingly haven’t the faintest about what they’re doing.

Sir, Matthew C Klein writes “Rightly or wrongly, most central bankers think their mission is to keep the growth rate of consumer prices slow and stable. Even in places, such as America, that also ask the central bank to promote “maximum employment”, the inflation mandate is paramount.” “Central bankers have one job and they don’t know how to do it”, Alphaville October 18.

And the Klein proceeds to describe the existing confusion with respect to how to measure inflation, how to generate it if it is so good, and how to fight it if it is so bad. 

But equally, when central bankers have anything to do with bank regulations, they think their mission is solely to keep banks from failing, without giving a single thought to the fact that banks are supposed to allocate credit efficiently to the real economy.

And even in this their silly limited objective they fail; that because they have not understood that what is really dangerous to the bank system, is not what is ex ante perceived as risky, but what is ex ante perceived as very safe and which therefore can generate dangerous excessive exposures to what might ex post turn out to be very risky… all this currently aggravated by the fact that regulators allow banks to hold especially very little capital (equity) against what is perceived as safe.

Sir, do we have a problem!