Leave credit to the yield curve, not to cent­ral banks

Sou­maya Keynes’ column (Opin­ion, Novem­ber 3) high­lights the fun­da­mental flaw in mon­et­ary policy, as prac­tised in the US, the UK and many other coun­tries — the assump­tion that cent­ral bankers, as cent­ral plan­ners, can do a bet­ter job than the fin­an­cial mar­kets in vary­ing nom­inal interest rates, in response to chan­ging eco­nomic con­di­tions, so as to max­im­ise eco­nomic out­put while main­tain­ing level prices and fin­an­cial sta­bil­ity.

In effect, cent­ral bankers, as cent­ral plan­ners, are assumed to be bet­ter equipped through their pre­sumed fore­cast­ing skills than the fin­an­cial mar­kets to con­tinu­ally vary interest rates in a man­ner that will pro­duce solid, non-infla­tion­ary eco­nomic growth.

His­tory teaches oth­er­wise. Policy tools are poor prox­ies for the actual give and take of the credit mar­kets, which reflects what is hap­pen­ing in the real eco­nomy, not in some flawed model. By now, the dec­ades of the waste­ful eco­nomic volat­il­ity triggered by cent­ral bank interest-rate manip­u­la­tions should have taught that fin­an­cial mar­kets are much bet­ter equipped than cent­ral bank bur­eau­crats to vary the price of credit, across the yield curve, in a man­ner that max­im­ises eco­nomic out­put in a more stable fin­an­cial man­ner than cent­ral banks have ever pro­duced.

Bert Ely
Pres­id­ent, Ely & Com­pany, Alex­an­dria, VA, US