Real Motives of the Central Banks

Central Banks Seek New Options –

The click-through headline for this article is Holding Fire – For Now – But Laying Plans.

Any article about the central banks nowadays has to liken their actions to a war. Institutions will use the language of war so that they can justify their actions. The logic is that we are fighting a war so we need to anything to win it.

The Fed is telegraphing its intentions to buy more private assets, while the ECB is doing the same with sovereign debt. The banks have made bad bets buying these instruments and are bleeding capital; hence, the central banks are stepping in to buy these assets at high prices to bai lout the banks.

Both central banks would love to act now, but they are constrained by different forces. The Fed has to wait for bad economic news so that it can buy the assets under the guise of providing more liquidity to boost employment. The ECB has to get the word from the Germans before it can do anything.

All monetary expansion has done is inflate asset prices to give the banks riskless profits. It has not helped the unemployed Americans and Europeans who are hurting.

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