Free market economy, or the lack of…

To those of us who studied business and some economics a few years ago the current role of the central banks is hard to understand
I attach below an excellent article by George Gilder courtesy of John Mauldin.

The central theme of the article is pretty straight forward and should not surprise anyone. A planned economy is a planned economy, free markets are something else.

Since the collapse of the financial system in 2008 central banks have taken over. That made sense in a situation of emergency, but the current role is clearly taking things too far. Last week the stock markets went on a binge simply because the Fed announced that it was delaying the famous tapering. That was bad enough, but the really interest thing was this graph


The Fed led the markets, it is called now forward guidance, showing them what the interest rates are going to be in the near future. Free markets are not about this. The bond markets should be influenced by the central bank, but the concept of the stock markets looking at the Fed like some kind of drug addict expecting their dose is ludicrous.
Central banks are not accountable to voters. The idea that they are independent of political influence is naive, to say the least. What is effectively happening is that governments are indirectly taking control of interest rates, a fairly important part of any economic system. I do not think that any US president would object to a Fed chairman who says that he would do anything to lower unemployment, or that he will keep printing money for as long as it is necessary. Printing money is addictive, once you start you just cannot get enough of it.


One thought on “Free market economy, or the lack of…

  1. Finally!!

    In essense this is a correct assessment of the current Western economic situation. Here in the UK, the Bank of England base rate has been sitting at an all-time low of 0.5% for five years now, and Mark Carney has made it clear the Bank has no appetite to raise it any time soon.

    What I’d like to see is better mechanisms in place to control the sort of behaviour that caused the 2008 crash. I’d like to see truly empowered financial regulators, not the travesti that passes for the Financial Conduct Authority. I’d like to see colleagues in lower and middle roles across financial institutions taking a far more serious approach to their job and I’d like to see their superiors rather focusing on their staff and the company’s valued clients than on their annual bonuses (another topic deserving of a post of its own).

    In short, I’d like to see irrefutable proof that financials institutions are able to manage themselves without the tight grip that government exerts on them at present. As an insider, I have begun to see some signs of change, particularly in client due diligence processes, but nothing that leads me to believe we’re close to some sort of financial revolution to abort the next mother of all disasters.

    Now, write me a post on this topic, economist?


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