Can misguided monetary policy be a significant source factor for financial and/or economic crises and a source of loss of public confidence in institutionalized financial systems?
A key function of central banks in the context of their monetary policy is to take care of the value of money. In the context of increasingly frequent financial and economic crises, central banking increasingly applies other additional priorities related to the functioning of the country's economy when conducting monetary policy. Over the past few decades, mainly since the period of the oil crises of the 1970s, there has been a successive increase in the importance of the monetary policy of central banks carried out in more or less formal correlation with the socio-economic, budgetary, fiscal and social policies of the government taking into account the issues of changes in the rate of economic growth of the national economy, changes in the level of activity of the economic processes of companies and enterprises, changes in the situation in the labor markets and especially the issue of changes in the level of unemployment.
Just before the outbreak of the Great Depression of the 1930s and just before the outbreak of the global financial crisis of 2008, central banks first pursued a mild monetary policy for many years, so that when serious symptoms of an imminent financial and economic crisis appeared, resulting in a potentially high increase in unemployment and the occurrence of a recession in the economy, interest rates were raised, which then caused difficulties in servicing loans in many highly indebted companies and enterprises. Consequently, measures that were supposed to act as anti-crisis measures contributed to the accelerated development of the financial and economic crisis.
Over the past few decades of time, the importance of central banking has increased as not only the institution that shapes monetary policy, on which depends not only the value of money, but also the liquidity situation in the banking sector, the level of commercial bank lending, the scale of credit risk accepted by commercial banks in their bank lending activities and, indirectly, the economic and financial situation of many companies and enterprises that are clients of commercial banks. Therefore, also the changes made by central bank governors usually every few quarters or years in monetary policy strategies correlate to a large extent with what happens to the issue of inflation, if it is demand inflation and indirectly also the issue of monetary policy conducted can be correlated to a serious degree with important factors describing the macroeconomic situation of the economy.
The research shows that any type of monetary policy, i.e. conducted according to an anti-crisis and/or pro-development model of lax or tightened monetary policy conducted by central banking, may involve the risk of either succeeding in generating positive, pro-development effects supporting economic development or making mistakes and generating financial losses in many economic entities and leading to a financial and economic crisis. The idea is that lessons should be learned from the mistakes made at central banks in terms of the monetary policies that are carried out, that monetary policies should be realistically improved based on the conclusions of research, that financial systems should be increasingly secure, that societies should not lose public confidence in institutionalized financial systems and, thanks to this, that another major financial and economic crisis should not occur in the future.
This issue is particularly important because of the security of the entire state financial system, since the central bank, in addition to being a bank of banks and a bank of issue, is first and foremost a bank of the state that creates monetary policy and participates in the creation of money. Since the security of the financial system is largely based on public confidence in the system, including the banking system, so every bank, including the central bank, should carry out its goals and tasks with full integrity, should not engage in international financial operations with a high risk of speculative investment, and should conduct monetary policy in such a way that it does not make serious mistakes in its conduct that result in the occurrence of subsequent financial and economic crises.
I have described the key issues of the central banking problem in my articles below:
Synergy of post-2008 Anti-Crisis Policy of the Mild Monetary Policy of the Federal Reserve Bank and the European Central Bank
Article Synergy of post-2008 Anti-Crisis Policy of the Mild Monetary...
Analysis of the effects of post-2008 anti-crisis mild monetary policy of the Federal Reserve Bank and the European Central Bank
Article Analysis of the effects of post-2008 anti-crisis mild moneta...
A safe monetary central banking policy as a significant instrument for liquidity maintenance in the financial system
Article A safe monetary central banking policy as a significant inst...
ACTIVATING INTERVENTIONIST MONETARY POLICY OF THE EUROPEAN CENTRAL BANK IN THE CONTEXT OF THE SECURITY OF THE EUROPEAN FINANCIAL SYSTEM
Article ACTIVATING INTERVENTIONIST MONETARY POLICY OF THE EUROPEAN C...
Anti-crisis state intervention and created in media images of global financial crisis
Article Anti-crisis state intervention and created in media images o...
In view of the above, I address the following question to the esteemed community of scholars and researchers:
Can misguided monetary policy be a significant source factor in financial and/or economic crises and a source of loss of public confidence in institutionalized financial systems?
Can misguided monetary policy be a significant source factor in financial and/or economic crises?
What do you think about this topic?
What is your opinion on this issue?
Please answer,
I invite everyone to join the discussion,
Thank you very much,
Best regards,
Dariusz Prokopowicz
The above text is entirely my own work written by me on the basis of my research.
In writing this text, I did not use other sources or automatic text generation systems.
Copyright by Dariusz Prokopowicz
Although central and private banks are powerful tools of societal control in a monetary production economy, their range is limited by the physical cyclicity ( waves transforming into distinct cycles) of our economy, in terms of natural motion and development, which is not subject to linear accounting models. So, yes, misguided monetary policy can be a significant source factor for financial and/or economic crises, with respect to failed macro-prudence, concerning the physics of social systems, dear Dariusz Prokopowicz .
The psychological momentum, i.e. the loss of public confidence in governing institutions of finance and economics, is equally important, when the crowds begin to sense the negative impact of institutional incompetence on their everyday lives.
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This essay is built upon an analogy. I examine the similarities between medical science's fighting for the health of the human organism and eco-
nomics' striving for the health of nations, for the good functioning of economic systems.
https://www.kornai-janos.hu/media/konyvek_cikkek/w20825/Kornai1983_The_health_of_nations_-_Kyklos.pdf
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This analogy Dariusz Prokopowicz came into my mind, when certain economic medicines do no more work to treat an acute illness, which can easily transform into a chronic disease or even mortality (generally by spreading armed conflicts in and between states).
In an economy where there are different ways controlling fluctuations, its relatively hard to lead to such a crisis unless when the magnitude of change in the monetary policy is big, yet also in a very sensitive economy relative to that tool. However in a developing economy where the central bank relies on the bank rate even when the fluctuations might have been caused supply rigidities or maybe a something volatile like fuel, it can lead to a crisis because the bank would have used a wrong tool for a situation. This is made worse disgruntlement from the private investors due to increased costs, and so on.
Both excess and lack of circulating money is deleterious. The Central Banks have the role of keeping the balance of public money issue and spending and the levels of production in the society, and the democratic government has the role of using the money to promote production and consumption of goods in coherent ways (to finance essential and strategic activities, and to provide the population with basic income for consumption of the produced goods, reaching "effective demand" (Keynes).
I believe it can be true as it can affect future perspectives. This policy approach can intensify the uncertainty and increase the range of fluctuations in the financial system and it's the main resource of financial crises.