Central Banks & Crisis

Are Central Bank Creating New Crisis

There are several good reasons to believe that central banks should tweak there policies else the global economy will be into Crisis.

Unconventional policies for a prolonged period with minimal effect on real investment led to Pent-Up Demand and unsustainable growth. Policies effect on exchange rate is also weaker because everyone is adopting the same strategy. These policies rather than creating global growth are taking growth from others.

Low deposit rates in long-run may lead to credit crunch. Loss of interest income and expectation of further drop in price is exaggerating already depressed demand and creating deflationary pressure. Too-low interest rate now is like a chronic affliction.

Credit expansion and transfer of wealth from savers to borrowers especially to large firms, which are hoarding cash or using it for share buybacks to boost their asset price. The cost of staying in this environment is building. The bubble will disappear if assets can’t grow into their valuation.

Regulations adapted by central banks have reduced banks willingness to lend to SME and entrepreneurs, who plays a key role for innovations and job creations. This may increase the probability of financial stability but at the expense of economic growth.

The concept of shared ledger (innovation of Bitcoin) disrupted the system and forced banks to collectively invest to develop R-3 Consortium. This innovation will also equip central banks with new tools to deal with economic cycles and will help them to know the risk in the system with minimal uncertainty. Also, transparency will help to earn back the confidence of people to boost aggregate demand. However, the utter lack of urgency regarding technological financial transform and arguments without merit is the hawkish bias of the central banks.

People are losing trust recent example is Brexit, the risk of contagion is high. Evasive statements (Fedequivocation) by central banks in symposiums are adding fuel to the distrusted environment.

Central Banks should collectively work to exit prisoner's dilemma. As Economies are integrated, central banks should look consequences of policy not only domestically but also globally. Central Banks should undo the prolonged stimulus, adapt rapidly changing economic environment, promote innovations and should frame clear and concise regulations for new technological environment and for corporate social responsibility.  

If Central banks does not collectively work on innovative solutions to overcome current situation global economy will face the worst crisis till date and this time it will be “Monetary System Turmoil”.

 


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