One thought on “Central Banks are full of B$

  1. So I really considered leaving a long, crazy rant, but I don’t have time, so I’ll give you a short, crazy rant.

    Begin Rant

    Asset purchases by central banks necessarily enter into the economy at the point of purchase and propagate from there. In the case of mortgage bond purchases, this is typically banks and large investors. Where it goes from there depends on their actions. Importantly, that is not under the central banks’ control. If the banks make more funds available for mortgages, as is likely the case, mortgage rates will decline, more homes will be purchased, and demand will increase for building materials, appliances etc. Since this is concentrated in one area, rather than being disbursed throughout, serious distortions can arise that just create a new and interesting problems for you to solve. But, because the macroeconomic models that central banks use don’t distinguish between different sectors of the economy, they think everything should work out fine. If, on the other hand, your goal is to increase lending to small businesses, then you need to purchase small business’ debt. But it’s a game of whack a mole. There will be unforeseen consequences to that policy, too. Best policy is to follow the traditional approach, which was not to set interest rates at all, and during a banking panic, lend in unlimited quantities, at penalty interest rates, against good collateral. That way, during good times, you don’t distort the structure of production, and during bad times, you are rescuing only those institutions that are fundamentally sound.

    End Rant

    And, yes, that is the short version.

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