How should central banking monetary policy be conducted so that it is realistically anti-crisis, i.e., so that it does not lead to further and even greater financial and economic crises than previous ones?
Prior to the Great Depression known as the Great Depression of the 1930s, the Federal Reserve Bank raised interest rates. When commercial and investment banks also raised interest rates at that time, the result was a significant decline in borrowers' creditworthiness. There was a crash in bank lending in the form of loans. There was a decline in investment, income, consumption, production, income growth, etc. Unemployment increased. There was a stock market crash on the New York Stock Exchange, which became a symptom and an additional factor in the development of a deep economic crisis. The result was a strong increase in unemployment and the pauperization of societies in many countries, including developed countries. The Great Depression of the time may also have been a significant factor in the emergence of negative public sentiment, a change in policy in Europe and the outbreak of World War II. The negative effects were many, and it was only the anti-crisis, Keynsian economic program based on activating demand through new publicly funded investments that pulled economies out of the crisis lasting several years. Years later, it was recognized that raising interest rates by the central bank in a situation flowing from the economy with symptoms of an impending crisis, instead of helping the economy it exacerbated the impending economic crisis. The prevailing opinion among economists at the time was that the central bank had misread those first symptoms of an impending economic crisis.
In contrast, prior to the global financial crisis of 2007-2009, the Federal Reserve Bank kept interest rates low for several years. Loans offered by commercial banks became cheaper. In addition, a system was created to provide systemic protection against banks, a system of government guarantees for any increase in systemic credit risk. The result was an increase in the sale of mortgages based on funds raised from subprime bonds for citizens who were not creditworthy. Rating agencies attached to investment banks issued the highest AAA recommendations for those investment financial instruments that contained already defaulted loans, i.e. bad loans. This led to the appearance of symptoms of the economic and financial crisis already in mid-2007. Real estate prices, instead of continuing to rise, began to fall, unemployment began to rise, and a significant portion of mortgages stopped being repaid. When the world's fourth-largest bank Lehman Brothers declared bankruptcy in mid-September 2008, there was another wave of stock market repricing. This date was symbolically considered the beginning of the global financial crisis, the biggest financial crisis in the world's economic history. As part of the anti-crisis measures, a large amount of additional money was pumped into the banking system to limit the scale of the decline in commercial bank lending, in order to maintain liquidity in the banking sector. As a result, it was possible to limit the scale of the developing financial crisis.
In view of the above, sound monetary policy-making by the central bank is an important anti-crisis or pro-crisis factor in the economy. I investigated the sources of the global financial crisis through the prism of the credit risk management process in commercial banks and in the context of central banks' monetary policies. I have posted the conclusions of my research in publications on this issue, which, after publication, I also posted on my profile of this Research Gate portal. I invite you to join me in scientific cooperation on this issue.
In view of the above, I address the following question to the esteemed community of researchers and scholars:
How should the monetary policy of central banking be conducted in order to be realistically anti-crisis, i.e. not lead to further and even greater financial and economic crises than the previous ones?
What is your opinion on this issue?
Please answer,
I invite everyone to join the discussion,
Thank you very much,
Best wishes,
Dariusz Prokopowicz
The central banks should focus on two well-known pillars - monetary stability (fighting - symmetrically - inflation and deflation) and financial stability. Simple as that. Multiplication of goals and activities will be counterproductive, as we can see now the consequences of abandoning primary goals.
Condemn any money making activities in financial and real market including interest-bearing financing and transactions, gharar (speculative) and maysir (gamble) financial activities and esspecially avoid any social failure financial model.
The step to be adopted, definitely, depends on the wisdom of the Central Bank and the kind of economic crisis faced by the government. There is a Management Approach termed the 'Contingency Approach to Management, which suggests that adopting a line of management strategy depends on the circumstances and resources. Prescriptions for fighting depression and inflation are different. It is an open-ended question attracting multiple answers as types of crises are many.
May I please suggest that you read the recently published book:
"CENTRAL BANKS AND MONETARY POLICY"
by Jakob de Haan and Christian Pattipeilohy
published by Edward Elgar,
ISBN 978-1-83910-488-6
Dr. John Consiglio
Dept of Banking & Finance,
The University of Malta
I recommend you my recent paperArticle Monetary Policy after the Great Moderation
. Another interesting one isArticle Money, Lending and Banking Crises
. Additionally, John Taylor has many papers regarding this, in fact, he developed a rule, the "Taylor' rule", which was applied by Central Banks during the period of high financial stability in many countries during 1987-2001 but the rule was not employed again until the beginning of the current inflation crisis. His Google Scholar page is "https://scholar.google.es/citations?user=HURCElMAAAAJ&hl=es&oi=sra".
1. Answers added by the scholars are indeed nice. However, the following points can be kept in mind before prescribing a final solution.
2. Some scholars assign great importance to monetary measures with belief that the monetary policy and financial variables can do the whole thing in a country. It is untrue. In the cases (in LDCs), where the non-financial variables play the more important role, monetary prescriptions fail to bring the desired result.
3. Secondly, a good book can outline the ideal principles with a belief that those principles will work everywhere. It cannot be taken to be granted, because all prescriptions cannot work equally in every country. In some countries, a prescription can work, while in other countries it has limited effect.
4. Finally, in 2020 when the covid pandemic started affecting many economies, each economy handled it in its own way. Prescriptions of a book have not been applied in toto in every country with equal belief and faith.
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