The unprecedented behaviour of the central banks | Gavyn Davies | Insight into macroeconomics and the financial markets from the Financial Times –

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This is a really interesting article if you are looking to understand the current financial crisis. It argues that a large part of th financial sector has been quasi nationalized by the central banks.

The unprecedented behaviour of the central banks | Gavyn Davies | Insight into macroeconomics and the financial markets from the Financial Times –

Because many Western countries have not taken bold political decisions, it has been left for central bankers to intervene on an unprecedented scale. The biggest examples of political indecision or stalemate have been demonstrated in the US and Germany, in my view.

Indebted sovereign countries, like the UK and France, have been wary of increasing their national debt – either because they are frightened of the credit analysts downgrading their debt or they are following an austerity policy. Meanwhile, one stage removed central banks have been increasing their balance sheets on both sides by issuing credit and buying up debt from banks and sovereigns (for example the ECB for Spain, Italy and Greece).

Sooner or later sovereigns will need to stimulate growth, preferably with carefully targetted capital expenditure projects, like China’s example in 2008. As highlighted in the Economist there are two problems a short-term one and a medium/longer-term. Reducing national debt must be deferred to the medium term but short actions are required to stimulate growth – this policy is favoured by the IMF and many leading economists. The Economist talks of self induced sluggishness in 2012 because of absence of political decisions in the US and Germany.

What do you think?

4 responses

  1. Pingback: Fed to reveal almost all | Gavyn Davies | Insight into macroeconomics and the financial markets from the Financial Times – « Dr Alf's Blog

  2. Pingback: The falling euro and the crisis that wasn’t | The World | International affairs blog from the FT – « Dr Alf's Blog

  3. Hi Alf,
    You don’t address the key issue: where is the capital to fund government’s capital expenditure going to come from? Borrowing more to spend more is nonsensical.
    Given that the present crisis is founded in the profilagacy of the present generation, many of whom have built healthy capital reserves (e.g. middle earners with property and pensions that now seem out of the reach of future generations) whilst saddling future generations with the burden of their national debt. I suggest that they might be targeted to pay for their sins. The easiest way to achieve this without impacting on their spending patterns is to take it at death… swingeing death duties! I’ve not done the sums to see how this might impact on the deficit, but it seems a good place to start.
    As for government capital expenditure…. forget it. What governments need to do is stimulate private sector capital expenditure.

    • Hi Tony,

      Many thanks for sharing your views.

      It seems that you do not agree with my original post & I do not agree with your response. That’s not hostility – it’s healthy debate!

      Unlike the phyical sciences where causual logic is often present, in the the social sciences (politics, economics, sociology etc.), there are often divergent views.

      Personally, I believe that when individuals and corporations fail to take decisions that are in the wider good, there is a responsibility for governments, central banks and institutions like the IMF (or even the EU) to intervene. I also believe that if most Western governments follow austerity policies at the same time, this will lead to recession or possibly depression. I simply support the position of the IMF, OECD & the Econonomist that short-term priority should be diverted to growth policies – this is is not deflecting from addressing debt but simply addressing it over a longer time period. The Economist clearly differentiates between short term and medium term interventions for the Euro.

      Capital expenditure has a very powerful multiplier effect whether it’s at individual, corporate or public sector levels. So I agree that governments need to intervene to stimulate Private Sector investment. Unlike you, I believe that there is a very strong case for stimulating Public Sector investment too. For me, I would prefer to see capital expenditure financed out of short-term Public Sector cuts – it’s a question of more bangs for your buck. However, I would also increase short-term debt to finance top-quality Public Sector capex projects too.

      Finally, let me address national debt levels. I agree with a number of Nobel Economists who favour state intervention (Keynesians) to address the economic crisis. On this point, we disagree!


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