Central Banks are Completely Oblivious

By: C.Jay Engel
Peter Praet

Sometimes, when central bankers talk, they reveal within the very same discussion a sign of complete obliviousness. The ECB's Peter Praet recently gave an overview of monetary policy and price stability. By way of reminder, price stability refers to the central bank's efforts to keep the prices we pay from dropping lower. This would be terrible.

In his overview, he describes what preceded the 2008 crisis with this:

In 2008 the global economy faced a calamity unparalleled since the Second World War. The crisis had been preceded by a mood of over-optimism in several advanced economies. Expectations about future income were at odds with slowing underlying growth, giving rise to an "expectations gap". In the euro area, expectations were reinforced by a revived sense of economic prosperity that was associated with the introduction of monetary union. Firms were borrowing against their future income expectations in some countries; households and governments were doing likewise in other countries.

So the problem, in Praet's view, was too much borrowing/spending based on unrealistic expectations. Then everything turned and there was too much debt and balance sheets everywhere were severely damaged. Following this, the recession reared its ugly head.

Now, consider how Praet describes the central bank's "success:"

Our measures are working their way through the financial system and have led to a major easing of financing conditions for euro area firms and households, benefited credit creation and contributed to a more robust and sustained economic recovery.

Monetary policy is playing a central role in supporting consumption: lower interest rates are ensuring favourable borrowing conditions and encouraging households to bring forward durable consumption as well as firms' investment. Consumption of durable goods has rebounded in recent years, and especially in countries where credit was previously very tight.

The relation between what was described as the problem and what is being offered as proof of success is clear to anyone who is not a professional monetary bureaucrat. They recreated the problem and claimed it as a trophy of achievement!

This is quintessential central banker. They don't see a monetary problem until it punches them in the face.