It’s getting painful

Published: Sun 19 March 2023
Updated: Mon 20 March 2023
By steve

In Markets.

Let’s get Fis(i)cal!

Central bankers are Wizard of Oz figures. They have illusory power. But as long as the illusion can be maintained, they can make things happen as though they had real power. Ben Bernanke admitted as much in an aside to one of his successors (I don’t have a reference, it’s possibly something that Dario Perkins said). Obviously, jerking around interest rates does transfer demand from person X to person Y. If Person X has a very different propensity to consume than person Y, real overall demand in the economy can change. But this assumes that these differences really exist and are major, and it also assumes that central banks are truly independed of political influence. Well, I think the jury is still out on that.

Recently, there is a big problem. Governments have spent like crazy to prevent a global pandemic crashing the world’s economy. This has cost them a lot, but is generally earned them political capital and improved chances of being re-elected. Allowing central banks to crash the economy, and destroy all those jobs that were saved by muscular fiscal policy would be … negative for the prospects of governors getting selected for additional terms. Maybe.

Central banks have been jerking up interest rates for a year or so now, hoping that the policy will simply dampen down demand just enough to bring bring job vacancies into line with the actual labour supply. With the collapse of Silicon Valley Bank, Signature Bank, First Reserve Bank and Credit Suisse it’s dawning on them that the soft landing will prove elusive, just as most commentators had predicted.

Tomorrow, markets will open, and I fear that some other banks will announce that they are closed for withdrawals. Maybe I’m being too pessimistic, and that this time is different. Well, it is different to 2008, but it’s similar enough to cause a lot of sleepness nights for bankers.

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