Central Bankers Gone Wild

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Yes,the world of central banking is sorting itself out and acting firmlyon lessons learned. This can only lead to a far more activist andeven successful banking regime and also an early end to the too bigto fail nonsense as a license to leverage up the financial Ponzischeme. With central banks watching each other, it will be difficultto go astray and we can expect to see a body of best practice toemerge.
Recallthat up to now, best practice has been a combination of the 1933regulatory regime for financial institutions along with Reaganshifting the tax take to the left side of the Laffer curve. Thisprovided a natural non inflationary economic growth of around 4% fortwo and one half decades. It could have been improved upon withtargeted lending guarantees and further regulatory reforms but wasplenty good enough.
Atthe present, those that could do not have the knowledge to do better. This is unfortunate but the globe is no longer utterly dependent onAmerican wisdom. Thus optimism remains the order of the day.

Globaleconomy: Central bankers gone wild

Centralbankers rarely do radical, or even surprising, things. This week ithappened twice. Hold on to your pinstripes.

ThomasMucha December14, 2012 06:19
BOSTON— Central bankers aren't exactly the most exciting people.http://www.globalpost.com/dispatch/news/business/121213/global-economy-central-bankers-federal-reserve-ECBSure,they're smart.Yes,they understand the complex interplay of economics, finance,politics, markets and all the other factors that make the globaleconomy fly or fizzle.Butthey're often, well, predictable.Andwhen it comes to explaining the mysterious workings of the globaleconomy they're often, to be polite, incomprehensibly dull.Stilldon't believe me?Checkout this bit of poetry taken directly from the minutes of the Oct.23 FederalReserve's Open Market Committee meeting (andif it doesn't make perfect sense, no need to decipher it):

"TheManager of the System Open Market Account (SOMA) reported ondevelopments in domestic and foreign financial markets during theperiod since the FOMC met on September 12-13, 2012. The Manager alsoreported on System open market operations over the intermeetingperiod, focusing on the ongoing reinvestment into agency-guaranteedmortgage-backed securities (MBS) of principal payments received onSOMA holdings of agency debt and agency-guaranteed MBS and thepurchases of MBS authorized at the September FOMC meeting. Byunanimous vote, the Committee ratified the Desk's domestictransactions over the intermeeting period. There were no interventionoperations in foreign currencies for the System's account over theintermeeting period."

Thejargon is no different in Brussels,London, Tokyo, Beijing orother places around the world where pinstriped policymakerscongregate and pontificate.Butsometimes even central bankers can be perfectly clear.Theycan also, apparently, be surprising.Ithappened this week in both the world's largest economy (the US) andthe world's largest economic bloc (the European Union), so it's bestyou pay attention.Theimplications of these remarkable central bank moves could have veryreal implications for you, me and everyone else on planet earth.Let'sstart with the US Federal Reserve, which did something that it'snever done before: It tied its actions to actual, concrete numbers inthe economy.TheFed said it would keep stimulating the weak US economy until thenation's unemployment rate fell to 6.5 percent (it's now at 7.7percent). It will also keep interest rates historically low as longas inflation in the US remains under 2.5 percent.Thatmay not sound radical, but it is.That'sbecause it's the first time the US central bank has used suchexplicit targets.Whythe switch?TheFed hopes it will be a more transparent way to let markets know itsplans. "We think it's a better form of communication," FederalReserve Chairman Ben Bernanke said.Butmore importantly, the use of explicit "guideposts" signalsthat the Fed is far more concerned about the weak employmentsituation in America than it is with its primary worry of keepinginflation under control.Themove is part of an evolution in central bank thinking that's beenpushed, in particular, by the president of the Federal Reserve Bankof Chicago, Charles Evans.Here'show Evans described his thinking, wayback in 2011:

“Imaginethat inflation was running at 5 percent against our inflationobjective of 2 percent. Is there a doubt that any central bankerworth their salt would be reacting strongly to fight this highinflation rate? No, there isn’t any doubt. They would be acting asif their hair was on fire. We should be similarly energized aboutimproving conditions in the labor market.”

Soit's burn, baby, burn until the job market improves.Thatmeans we should expect the Fed's loose monetary policy to continue atleast into 2015 when — fingers crossed — the US jobless rate isforecast to hit that 6.5 percent target. Meanwhilein Europe, the whiff of radicalism this week mixed with the stale,corpse-like odor of economic decline triggered by the ongoing eurocrisis.Europeanfinance ministers agreed — for the first time — to place between100 and 200 banks across Europe under the supervision of the EuropeanCentral Bank.Themeasure, which still needs approval by the European Parliament, is agiant step towards the tighter economic integration necessary tobring the euro crisis under control.Moreover,the Europeans only began talking about a move back in June. Gettinganything done in Europe in six months is a major accomplishment.Here'show TheNew York Times speculated on what the development could eventuallymean:

"Suchmeasures could include a unified system, and perhaps shared euro arearesources, to ensure failing banks are closed in an orderly fashion.This could be followed, in time, by measures intended to reinforceeconomic and monetary union, including, possibly, the creation of ashared fund that could be used to shore up the economies ofvulnerable members of the euro zone."

EuropeanCentral Bank chief Mario Draghi called the unified bankingsupervision an "important step."Evengrumpy German ChancellorAngela Merkel seemed happy with the decision, calling it “a bigstep toward more trust and confidence in the euro zone.”Sothere you go, world: central bankers gone wild.Let'ssee where this party goes from here.