Central Bankers Add to the Economic Malaise…

22nd October, 2008.

I am dictating this piece down the phone from Budapest in Hungary where I have just arrived to deliver a lecture to the Ybl Club. My hosts were in a state of shock on arrival because the central bank of Hungary has just raised interest rates from 8.5% to 11.5%…

This is yet another example of central banks focussing on the concerns and interests of one half of the debt equation – namely the creditors – while using interest rates to punish the other half i.e. the debtors. Although I have not seen evidence of overdraft rates in Hungary I am assured that they are well above 14-15% just as in the UK. The impact on small businesses and on corporates trying to stabilise their businesses in the midst of this turmoil can only be imagined. Once again central bank governors are exacerbating the disease at the heart of this economic crisis: excessive credit that is now being deleveraged chaotically. By these actions central bank governors are guaranteeing that healthy businesses and households are weakened and bankrupted thereby turning the disease into an epidemic of defaults and bankruptcies. Ironically it will be the defaults of corporates, small businesses and households that will, through negative feedback loops, further destabilise the financial system. It is extraordinary that the highly trained professionals inside central banks and the finance ministry cannot see what must be obvious to those in the streets of Budapest who would not consider themselves economists, namely that this action while it might temporarily attract foreign flows of capital will only serve to prolong the crisis.

Keynes would be turning in his grave. After 1929 he emphasised the essential point that monetary theory should be used to dampen down the fever of financial crises. The current celebration of his work focuses entirely on his use of fiscal policy to revive the corpse of depression-hit economies (for more on this read the economist Geoff Tily: Keynes’s General Theory, the Rate of Interest and ‘Keynsian’ Economics). Keynes however preferred the far cheaper and more effective route of using monetary policy to lower all rates of interest. short and long, real, safe and risky If only the central bank governors and in particular the governor of the European central bank  followed all of Keynes’s policies, not just his fiscal policies!

Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInEmail this to someonePrint this page

7 comments to Central Bankers Add to the Economic Malaise…

  • Adrian MacFhearraigh

    Surely the actions described in the following excerpt are more a positive feedback rather than a negative feedback:

    “Once

    again central bank governors are exacerbating the disease at the heart of this economic crisis: excessive credit that is now being deleveraged

    chaotically. By these actions central bank governors are guaranteeing that healthy businesses and households are weakened and bankrupted thereby

    turning the disease into an epidemic of defaults and bankruptcies. Ironically it will be the defaults of corporates, small businesses and

    households that will, through negative feedback loops, further destabilise the financial system.”

    I make this comment with the understanding

    that if the input to the feedback loop is negative and the resulting outcome from the feedback is even more negative, this consequently is in fact

    positive feedback.

    Output caused by negative feedback is an inversion of the input to the feedback loop. This clearly has not happened with

    the remedies implemented by central bankers and governments around the world.

    This raises the fundamental question are the financial

    institutions monitoring the incorrect signals or are the feedback loops badly designed?

    Personally it is a case of flawed economic model

    designs and consequently economies are impossible to control to achieve stability. Central bankers and governments are simply employing faulty

    tools that are used to assist in making extremely important decisions that affect the lives of many, in particular the most vulnerable in society,

    and of course these decisions also impact biodiversity enormously.

    It will be a challenge to change these flawed economic model designs for

    this will require a significant change in mindset.

  • Adrian MacFhearraigh

    Ann,

    I agree, the capital injections have a negative amplification or damping effect but do not effect the true cause of

    the situation. This results in a false sense of control which in reality results in the most vulnerable people around the world and the natural

    world absorbing the outcome of these flawed economic remedies.

    This leads back to my fundamental question and my comment as to what is

    required.

    You are probably more knowledgable about the financial system than any financial or economic expert that is paraded in the media.

    Your book ‘The Coming First World Debt Crisis’ is evidence to this fact and your slight misinterpretation or misdescription of feedback loops is

    an oversight. What I and many others should be more concerned about are those media paraded economic experts and those similarly trained who are

    employed by financial corporations and government institutions, do they understand feedback loops. Obviously not judging by the effects of their

    remedies!

    Adrian

  • Maybe this shows the world at long last who pull the real financial strings: the central bankers, not the

    politicians!

    If only the mathematics of exponential growth and compounding interest on interest were understood…

    With lots of

    sighs,

    Sabine
    Publisher, Online Petition
    “Stop the Cash Crumble to Equalize the Credit Crunch” http://tinyurl.com/666rwd

    Organiser, Forum for Stable Currencies

  • ann

    Adrian, Thank you for this helpful comment. I personally struggle with the concept of positive feedback loops…although

    think that I dimly understand them. In the example of interest rate hikes, you are right, that is a negative feedback, exacerbating the outcome

    from the feedback, and therefore is in fact, positive. I have been using negative feedback loop to describe capital injections into banks, which

    are ‘positive’ in the sense that they may be costly, but do no harm (in contrast to hiked interest rates). However, because the capital

    injections do not address the real disease – excessive debts – the feedback loop is negative.

    Thank you for your attention….

    Ann

  • ann

    Adrian,

    Just one more point: I really mean to say a negative amplification effect….I think.

  • Good day! Do you use Twitter? I’d like to follow you if
    that would be okay. I’m definitely enjoying your blog and look forward to new updates.

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>