By refusing to acknowledge the importance of total spending capacity, policy makers have damaged income potential to a considerable degree. In the process, they have provided insufficient reasoning for what is now a lower growth trajectory, than existed prior to the Great Recession. As James Alexander notes in a recent post:
The question of trends is important. If we took the trend from 1996 to 2007, then the current Euro Area NGDP and RGDP growth rates looks awful. What should be unquestionable is the dangers of too low NGDP growth, the only unanimous conclusion of fifty years of macroeconomics. Low or negative NGDP growth causes unemployment and welfare loss - as we are seeing now occurring in Switzerland and have seen in many monetary areas since 2007.Even as central bankers continue to short monetary policy, they remain sensitive to the favored status of banks in this set of affairs. Hence central bankers are still giving preference to tools for emergency lending whenever "necessary". George Selgin notes a propensity to use emergency lending, in spite of the fact central bankers are resisting full monetary representation for the public, and adds:
...central bank emergency lending can be justified only to the extent that it succeeds in keeping overall spending stable...a central bank that allows the overall volume of spending to collapse has blown it, no matter how much emergency lending it undertakes. Indeed, to the extent that a central bank engages in emergency lending while failing to preserve aggregate spending, it may be guilty of compounding the damage attributable to the collapse of spending itself with that attributable to a misallocation of scarce resources in favor of irresponsibly managed firms. Thanks to moral hazard, the extent of such misallocation, instead of being proportionate to the actual volume of emergency lending is augmented by the expectation that such lending will continue.Like Selgin, I am quite discouraged by the fact that policy makers cannot imagine better ways to approach central banking. In particular, asset formation has not changed in any productive capacity, something which has not been acknowledged since the Great Recession. Real reform is needed, in terms of broader ownership capacity. Simpler structures are needed for local asset holdings and building component formation, in order to maintain growth well into the future. Until better economic access is created, the tendency for moral hazard to affect monetary policy could likely remain.
Moral hazard has proven to be a factor, which makes it easier for central bankers to disregard true monetary representation. Perhaps the very accuracy of a nominal target, is what concerns policy makers. If so, why? These are issues which need to be openly discussed. Will citizens finally become more aware, what is at stake in present day central banking? One can only hope that 2016 will be a good year, for the airing these issues deserve.