On Central Banks

I came across something interesting earlier this week. Steve Waldman at Interfluidity had some very interesting thoughts about central banks, those pseudo-public entities who are supposed to insure the financial systems run efficiently but instead tend to manipulate market to benefit the super-wealthy. Anyway, here are some excerpts:

For now, central banks are all we have to prevent a catastrophic unwinding of our unstable financial system. But they had everything to do with getting us here. It's not just the Fed, with its famous "serial bubble-blowing", its cheering on of any novelty as beneficial innovation, its absolute refusal to peer into the magical sausage factory that Wall Street had become. The problem with central banks is much bigger than that...

In the USA, Japan, China, Europe, central banks have indeed been "active practitioners of the art of stabilizing macro confidence". For most of those years, it seemed like they were succeeding. They were never succeeding. Call it what you want, call it "Bretton Woods II", call it "financial imbalance" or a "global savings glut" or "exorbitant privilege". Each central bank, while trying to stabilize its own bit of the world, found itself with little choice but to support and expand unsustainable financial flows on a scale so massive they have reshaped the composition of every major economy on the planet...

[W]hat the US economy produces is no longer well matched to what Americans consume, and we are structurally unprepared to generate tradables, goods or services, in quantity adequate to cover the difference. The Fed's magic wand will be of no use if manufacturers in Asia and oil producers in the Gulf stop giving us stuff for free, using central-bank financial alchemy to hide their generosity.

Things may turn out okay. We've already begun to "adjust", and knock on wood, we'll manage a worldwide reequilibriation before things get too ugly. But it'll be a close call. That financial alchemy by central banks is the ultimate source of skyrocketing inflation in China and the Gulf states, and an ominous sign that Stein's Law is beginning to bite. We may yet escape, but we have been drawn very close to something very dangerous, to a genuine crisis of scarcity in the United States and a catastrophic failure of Say's Law in China, to mass unemployment, social instability, and fingers and missiles pointed in both directions across the Pacific. This is serious stuff. And central banks are largely to blame.

He suggests that if markets had been allowed to correct in response to the imbalances when they were created, then problems would not have grown to be as large as they have. I think they is something to this, for sure. It only because central banks have facilitated these imbalances because it benefited the super-wealthy. Off-shoring manufacturing to 3rd world countries is the prime example of that.

I'd like to think that the edifice is falling and this will create an opportunity to design the economy so that it benefits ingenuity and is fair to all actors. But I realize that's naive. This shot will never change...