Central banks can’t save the markets from a crash. They shouldn’t even try

https://i.guim.co.uk/img/static/sys-images/Guardian/Pix/pictures/2015/8/29/1440835575292/Cartoon-by-David-Simonds--009.jpg?w=700&q=85&auto=format&sharp=10&s=f14e4235d77db401def8e94d95fd3cc7

Financiers have come to expect central banks to help them out. Illustration: David Simonds for the Observer

 

Alarming data from China was met with a soothing hint about monetary policy. But treasuries cannot keep pumping cheap credit into a series of asset bubbles

Like children clinging to their parents, stock market traders turned to their central banks last week as they sought protection from the frightening economic figures coming out of China. Surely, they asked, the central banks would ward off the approaching bogeymen, as they had so many times since the 2008 crash.

The US Federal Reserve came up with the goods. William Dudley, president of the bank’s New York branch, hinted that the interest rate rise many had expected next month was likely to be delayed.

A signal that borrowing costs would remain at rock bottom was all it took. After Black Monday and Wobbly Tuesday, the markets recovered to regain almost all their recent losses.

It was just as if they had said to themselves: who cares if China’s economy is slowing; the “Greenspan put”, which so famously propped up US stock markets during the 1990s and early 2000s with one interest rate cut after another, is still in operation.

The meeting of the world’s most important central bankers in Jackson Hole, Wyoming, this weekend only confirmed the need for Britain, Japan, the eurozone and the US to keep monetary policy loose.

Yet the palliative offered by the Fed is akin to a parent soothing fears with another round of ice-creams despite expanding waistlines and warnings from the dentist and the doctor.

According to some City analysts, the stock markets are pumped with so much cheap credit that a crash is just around the corner. And they worry that when that crash comes, the central banks are all out of moves to prevent the aftershocks from causing a broader collapse.

But China, which has borrowed heavily to keep its economy moving, is running out of steam. Beijing has said it does not want to encourage another borrowing boom. But to prevent a crash, it is doing just that. In the last two weeks it has cut interest rates and loosened borrowing limits. It has even invested directly in the market, buying the shares of smaller companies.

So we face the shocking prospect of central bankers, in thrall to stock market gyrations, making the world a more unstable place with promises of yet more cheap credit.

Full article: Central banks can’t save the markets from a crash. They shouldn’t even try (The Guardian)

Comments are closed.