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A concise summary on the dangers to central bank independence [ClearOnMoney]
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A concise summary on the dangers to central bank independence

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Commentary

A concise summary on the dangers to central bank independence

25 Sep 2012 by Jim Fickett.

From John Plender at the Financial Times today:

with all the monetary stops now out, the exit from unconventional policy will be all the more challenging, especially in relation to central bank independence. In effect, central banks have been weakening their balance sheets both in terms of the declining quality of the assets they buy and the collateral they accept. The extreme case is Japan, where the central bank has extended its buying programme from government paper to commercial paper, corporate bonds, exchange traded funds and J-Reits. The quality of the sovereign paper acquired by the ECB also leaves a great deal to be desired.

If markets start to worry about central bank balance sheets, they may have to be recapitalised. At that point the politicians may demand more control over institutions that are clearly encroaching on fiscal policy, just when inflation may be about to return as a serious threat. Having distorted the markets to such a high degree, the central bankers will also be flying blind because the capacity of markets to send useful signals about inflationary pressure will be seriously impaired.

Throughout history monetary experiments have shown a nasty tendency to blow up. I repeat: this experiment is vast. It must not breed complacency.