Pedro Maria Martinez Villar Dear Pedro, you ask an excellent question. As we know, there are three main theories about the resolution of economic crises.

1) The first theory is the liquidation of unprofitable assets. Following a real estate bubble, it is not necessary or even desirable to try to maintain the real estate market at its original level. The economist Friedrich Hayek defended this thesis in the 1930s. In 'Price and Productio', he considers that crises come from an excess of credit by banks that have lent excessively. The crisis appears when the credit market becomes more constrained and the companies that have borrowed see the rates increase. For Hayek, the crisis is endogenous to the banking system and the interventions of the central bank and the state can at most maintain the old excessive investments, but this only makes the situation worse. In fact, most states have to accept some form of liquidation of excessive investments: see the Japanese, American or Spanish real estate market after the crises of the 1990s and 2000s.

2) Keynesian theory insists on two levers: "stimulus" through public spending and lower taxes and lower central bank interest rates. Nevertheless, the measures taken by central banks in the United States, Japan and Europe are not truly Keynesian in the classical sense of the term. They are rather measures of indirect financing of the state or even of companies. We are witnessing a mixture between liberalism (central banks should not finance the States DIRECTLY) and interventionism (central banks finance the States indirectly). This risks to create a) zombie companies that survive thanks to the low rates of the central banks, but without being profitable, b) creating incentives for States to go into debt beyond all economic rationality, c) but the greatest risk is a new form of inflation that leads to an increase in the price of real estate, which is a major source of inequality and the increase in the cost of living.

3) There is a third theory which considers that the central bank must intervene if the banking system is in difficulty. This is the theory of the lender of last resort. It is very old idea: we find it in Ricardo, Bagehot and later in Friedman (because yes, Friedman considered that the State should intervene in case of crisis). It is the theory that was applied by Bernanke in the United States during the crisis of 2008 and that contributed to avoid the deflagration of the whole banking system. But the problem with this policy is that it creates moral hazard and generates criticism from the population, which does not understand this aid for the "banks".

If I may express a personal opinion, I think that the current quantitative easing policy is EXTRAORDINARYLY dangerous. It creates endless money. If we look at the evolution of the money supply in the USA or in the Eurozone, we have the right to be very worried about the amount of money in circulation.

Source 1 : https://fred.stlouisfed.org/series/M1

Source 2: https://fred.stlouisfed.org/series/MYAGM1EZM196N

Dear Pedro, you have asked a very topical question, which is very difficult to answer in the light of well-known macroeconomic theories, because the current recpets by the FED or the Bank of Japan have no equivalent in empirically documented theories of macroeconomics. I agree with my previous speaker. However, I would like to draw your attention to the theories of financial crises by prof. Minsky and the School of Behavioral Finance in particular on bubble theories, which were discussed and shown in relation to the causes of the subprime crisis in the 2014 documentary Overdose. The Next Financial Crisis, which in my opinion is one of the best guides in modern macroeconomics related to the application and effects of monetary and fiscal policy by a leading capitalist country, the United States. Provides a link to the document https://www.youtube.com/watch?v=qc1WhS3qskU

In my opinion, in the near future, when analyzing the situation in the IS-LM model, the phenomenon of loss of sensitivity to interest rate changes in the financial market represented by the LM curve may occur(vertical line) and, consequently, the ineffectiveness of the fiscal policy in stimulating the market of goods and services , which will lead to a slowdown in the economy and the era of stagflation, i.e. the times of relatively high inflation (5-15% y / y) and close to zero GDP growth and rising unemployment in the real economy due to falling real income of households and enormous debts of individual countries (goverments debt) . A further effect, already more and more visible today, will be the formation of a large number of speculative bubbles on the markets, which are to protect savings, i.e. to escape inflation, e.g. land, housing, crypto, precious metals (gold, silver), precious stones and, of course, the stock market and corporate bonds. Governments in developed capitalist countries with strong capital markets will face the extremely difficult task of preventing, extinguishing crises in individual markets affected by the "fever" of demand for goods protecting against inflation. Expected result: global turbulence and financial crises in 2022-2025. Best regards

I agree with the risks as they are defined by Mr. Grala. But I am afraid, that they can develop very dangerous in the future. This expansion resembles the inflatory development during and after both world wars.

Pedro Maria Martinez Villar Dariusz Tomasz Grala

I agree with the previous answers. I just want to make two points.

1) I am not sure that traditional macroeconomic formalizations are relevant for understanding the effect of monetary policies. Many study exclusively aggregate data from an accounting perspective. I think that we too often forget the idea that economic markets are complex systems, i.e. made up of a N number of individuals who interact on the basis of expectations and abstract rules of behavior (avoid losses, increase the number of customers, create value for the consumer, find better suppliers). These emerging systems are capable of giving rise to forms of cooperation without external intervention (they are "spontaneous"). Keynesian macroeconomics seems to me to have little relevance, because it ignores the interactions and dynamics of the economy in favor of a static and punctual vision of national accounting data.

2) In monetary terms, this means that we cannot predict the effect of monetary policies. One can - at best - establish statistical correlations concerning the past (for example, the Philips curve). The danger is that monetary policies serve a double function. a) They allow governments to go into debt while maintaining the illusion that money creation by central banks no longer exists. b) They also benefit the financial interests of large institutions that can safely buy financial assets such as treasury bills. This support policy launched in 2008 had its arguments (I am thinking of Friedman's famous work on the crisis of '29). But they are now beyond any democratic control and maintain the financialization of the economy and the increase of public debts. In my opinion, this is a huge risk. I do not see much willingness to make a clear audit of unconventional monetary policies.

Source 1:

On economics as a complex system, see Law, legislation and Liberty by Hayek: https://www.amazon.com/Legislation-Liberty-Collected-Works-Hayek/dp/022678195X/ref=sr_1_1?crid=20PQE7SMY01CV&dchild=1&keywords=hayek+law+legislation+and+liberty&qid=1631527852&sr=8-1

Source 2: Friedman on the necessity for the Fed to inject liquidity into the financial system : https://www.amazon.com/Monetary-History-United-States-1867-1960/dp/0691003548/ref=sr_1_1?crid=3JA0WC40JBMD4&dchild=1&keywords=friedman+monetary+history&qid=1631527979&sr=8-1

Dear Pierre Baudry, in my argument I used the IS-LM model, which was created by John Hicks to analyze the classical Keynesian model in terms of the effects of conducting appropriate monetary and fiscal policies. The situation today is different from that 50 years ago when they used the Hicks model for government purposes. Therefore, my goal was to draw attention to the gradual decline in the effectiveness of the monetary and fiscal policy mix in a zero-interest environment in the medium and long term due to something that is not seen in the IS-LM model, i.e. a decline in the purchasing power of money and an increase in debt both the state and the private sector as a result of the policy of lowering the central bank's interest rates and quantitative easing. Central banks are currently focusing on providing money liquidity in the interbank market and trust that such a policy in times of crisis caused by the pandemic will bring a lasting rebound and GDP growth. I believe that at the present time in the most developed countries of the West it is very difficult to control the money supply in the situation of the gigantic issuance of dollars by the US and their expansion (spraying) around the Western world through American financial institutions and mobile applications for the stock exchange game such as Robin Hood or Etoro. If we add to this a completely "wild" cryptocurrency market that develops on the Internet, we create an explosive mixture of unprecedented strength, for an explosion that we only need a detonator that will cause mass panic, e.g. the uncontrolled bankruptcy of the Chinese company Evergrande ... Time will show how far my predictions are they are right when it comes to global finance. Best regards

https://www.cnbc.com/2021/09/17/china-developer-evergrande-debt-crisis-bond-default-and-investor-risks.html

In economies like the United States, in which interest rates were lowered directly at the beginning of the crisis, monetary policy was able to mitigate the biggest drop in output to some extent but less so in other economies like the euro area, where the central bank reacted later. Our results suggest that monetary policy is highly effective during financial crises, probably because it can reduce some of the adverse characteristics of financial crises like high uncertainty, low confidence, and low asset prices.

https://www.ijcb.org/journal/ijcb19q4a3.pdf

Am not in favor of ‚Palliative Economics‘.