Paul-Martin Foss of Mises Institute makes a point which is so difficult to fathom for even most economists – Central banks are nothing but central planners.
He says most economics teaching has poor things to say on planning but is in awe of central banking. Why should this be?
What is monetary policy anyway other than centralized economic planning? The central bank sets a certain target interest rate and buys and sells assets to achieve that target, creating money out of thin air to do so. This is nothing more than price-fixing. It may not be as total a price-fixing scheme as occurred behind the Iron Curtain, but it is price-fixing nonetheless, with all the subsequent negative effects that result. Only this time the prices being manipulated are interest rates, the prices of money and credit, perhaps the most crucial prices to a developed economy. These prices coordinate savings and investment throughout the economy, so that if they are manipulated the entire structure of the economy is distorted.
But so many people fail to understand that monetary policy is price-fixing. Many fervent advocates of the market economy, who may decry minimum wages, rent control, trade barriers, or other economic interventionism and price-fixing, have a huge blind spot when it comes to monetary policy. That’s despite the fact that the Federal Reserve’s dual mandate in federal law decrees that the Fed is to assure full employment and stable prices. Do they honestly expect the Fed to be able to try to achieve those goals without manipulating prices?
Politicians don’t understand monetary economics and neither do most businessmen. (Neither, for that matter, do most economists, but that’s a story for another day.) They don’t want to delve too deeply into the details, but the Federal Reserve hasn’t completely destroyed the economy yet so they can’t be doing too badly, right?
In a way, these politicians and businessmen treat monetary policy as though it’s magic. Just let the central bankers meet in their secret rooms and do what they want with the economy and everything will turn out just hunky-dory. And when it doesn’t? Well, the politicians will have moved on to higher office, the CEOs will have retired, and everybody who’s stuck suffering during the recession wonders why this keeps happening.
It will continue to happen until the mindset that an economy can be centrally controlled is no longer taken seriously in politics, business, or academia. As long as the myth that a handful of mandarins can guide the economy and produce economic growth, this destructive cycle of booms and recessions will continue to repeat itself.
As this blog has been saying there is nothing more ironical than a central banker talking about free markets yet fixing interest rates for the entire economy!
This itself is worthy a research. How did central banks go onto acquire this image of this really cool central body which could fix the economy. And not just acquire but make a lot of noise around it. What is essentially of the govt, by the govt and for the govt is seen as this independent from the govt body which can just create magic from thin air.