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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
Article
Monetary Stability and Crisis Predictions Fallacies
Author(s)
Mario Pines
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DOI:10.17265/2328-2185/2020.02.008
Affiliation(s)
University of Trieste, Trieste, Italy
ABSTRACT
In present days, our instable
financial markets, characterized by heavier growing monetary responsibilities, are
delivering and enlarging ever growing central banks’ functions. The financial stability
applied standards have been creating contradictory results in the recent Great Recessions
since the year 1987 up to the central banks model, after the 2008 last financial
crisis, with major central banks as the FED and the CEB (Diamond, 2007, pp. 189-200)
conflicting main operative areas, monetary and financial goals with unexpected results.
We have been living a very difficult and dramatic period, which suggests a lot of
reconsiderations about what the monetary policy means and may pursue and in which
area, with respect to the financial system restrictions, in particular, during the
post-second World War, based initially on the pseudo gold dollar parity, things
were relatively stable and major financial crises were happening in emerging peripheral
markets only. Financial stability was ever relevant, but it was not something to
which governments devoted institutional attention. Based on what happened during
the recent crisis, it is now of capital responsibility connecting monetary and economic
financial stability jointly. Central banks, on the contrary, seem not able to pursue
both functions relying on classical market tools. Up to now, the only obligation,
imposed to a central bank as a private agent, has been taking care of monetary stability,
to contain inflation rates over upper limits, assumed in entering definitely in
the legal tender monetary, regime almost everywhere over the planet. Originally,
for specific monetary policy purposes alone, between central banks and possible
financial entities, there were no guidelines or structural determined controls,
only institutional and statutory single bank’s operational clauses. There were no
legal constraints such as formal loan to-value, or loan to cash-flows, or formal
capital level limits, based on actual constraints. Free repurchase agreements and
sales or purchases of securities (the most relevant tools of monetary policy guidelines),
generally based on private financial covenants, were the sole most recurrent tactical
interferences in adjusting the economic free activity. The assuming statutory thresholds
were casual in the incorporating state, central banks used to monitor the activities
of agents through economic incentives, rather than mandating and monitoring specific
legal prescriptions. The evolving inconsistency of both activities has become even
more manifest; two conditions should be fulfilled simultaneously: To avoid dilemmas
in which a central bank might be called to make the autonomous independent management
choice between monetary price stability, pursuing at same time, generally incompatible,
financial stability, two different policies should be rarely jointly assigned to
same bodies, especially central banks. As regards the first issue, the IMF nevertheless,
with Brunnermeier and Sannikov (Brunnermeier & Sannikov, 2012), has argued that
price stability and financial stability are interlinked Short-term debt financing
played an important role in the run-up to the financial crisis, as increases in
leverage helped boost growth but also made the economy more susceptible to a downturn.
Since the recession, private agents have reduced their debt level while many governments
have increased borrowing. This deleveraging process appears to be holding back the
recovery, and the Japanese experience suggests that such deleveraging can continue
over an extended period”, unless in the long run we are all broken at state level,
as history seems now to prove. It is true indeed, as reminded by Lamfalussy (Lamfalussy
et al., 2010, pp. 7-9), and now widely proved by facts, that prices and the growth-employment
objectives, run into each other because it is seldom the case that the pursuit of
one is consistent with the pursuit of the second in global economies.
KEYWORDS
central banks, monetary policy, financial instability, gold standard and exchange rates
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