Tuesday, March 18, 2008

Inflation and CBs 3: "Bank of Last Resort"

I am not in favor of a central bank like the Fed, bailing out certain banks because they're "too big to fail". The Fed provided a credit line of around $30 B to Bear Stearns, which was bought by JP Morgan for only $2/share when less than a month ago it was trading at $90/share.

Then I read that had the Fed not acted so, other bigger banks like Lehman Brothers would be next to possibly free fall. And possibly threaten others like UBS, City and Morgan Stanley. Could this be true? I feel that the above-mentioned banks were too gigantic to be dragged down.

I hope that the next banking reform there will be that the Fed will just concentrate on setting monetary policy, no “bank of last resort” function, no bank supervision and bail-out function?

The private banks themselves should put up their own “bank of last resort”, use their own money that will be used to put up and maintain such bank. When that bank decides to bail out one or a few banks, it’s the bankers’ money that will be on the line, not the public’s. This will hopefully remove any “moral hazard” problem in banking.

On another note, a number of economic analysts are discussing how to stop inflation, and how central banks (CBs) or federal reserves can help to attain this goal. CB’s tight interest rates and other contractionary monetary policies over the long term, cannot reign in inflation. If interest rates are high to “warn” people not to spend too much, then entrepreneurs who have to borrow to start a new business or expand an existing one will have difficulty, the high cost of capital they will pass on to consumers, which can set inflationary pressure itself.

Central banks are among the remnants of central planning thinking of socialist school of thought. Central bankers maybe a “necessary evil” at the moment but nonetheless, they are unproductive bureaucrats who can better help the economy fight huge inflation spikes by becoming entrepreneurs who produce more goods and services, the best way to fight huge price spikes.

* See also: Inflation and CBs 2: Panama has no Central Bank, February 20, 2008


Anonymous said...

Very astute. This is exactly my thought on the bail out of big Bear Stearns and the like. I am tired of big government in my pocket. I am almost ready to retire, but for the "financial geniuses" bilking the working middle class for all we are worth, that day may never arrive. No one bails out the stiffs who may need a hand up from creditors and bill collectors for reasons beyond their fault. We, the people, are expected to pay for and take on the financing of the world's woes through bureacratic demigods robbing us in the name of human kindness and in the cause of freedom while we "suffer" the financial consequence of their lies and greed.

Bienvenido Oplas Jr said...

Yes, Central bankers are sometimes no different from other central planners and those in "central committee". Monetary policy and bank regulation is a technical issue that ordinary people don't understand. That's why when their pockets are raided by additional taxes or high inflation due to bail-out moves by a central bank, they tend to blame somebody else, not the central bankers.