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Subject:  An Aussie Central Banker talks sense Date:  12/13/2012  8:48 AM
Author:  notehound Number:  411177 of 539126

In a speech given in Bangkok yesterday, RBA Governor Glenn Stevens spoke a bit of common sense that appears to sadly lacking at the Fed, the BOE and the BOJ.

Here's a snip from Stevens's speech:

"...The problem [for central banks] will be the exit from [Quantitative Easing and Zero Interest Rate] policies, and the restoration of the distinction between fiscal and monetary policy with the appropriate disciplines. The problem isn't a technical one: the central banks will be able to design appropriate technical modalities for reversing quantitative easing when needed. The real issue is more likely to be that ending a lengthy period of guaranteed cheap funding for governments may prove politically difficult. There is history to suggest so. It is no surprise that some worry that we are heading some way back towards the world of the 1920s to 1960s where central banks were ‘captured’ by the Government of the day.

...[One might] wonder whether... governments recognize what central banks cannot do. Central banks can provide liquidity to shore up financial stability and they can buy time for borrowers to adjust. But they cannot, in the end, put government finances on a sustainable course and they cannot create the real resources that need to be found from somewhere to strengthen bank capital. They cannot costlessly correct earlier misallocation of real capital investment. They cannot shield people from the implications of having mis-assessed their own life-time budget constraints and as a result having consumed too much..."

On the other hand, perhaps the Fed, the BOE and the BOJ have simply accepted the fact that their primary job is to protect politicians from ever having to make difficult decisions. The more that central bankers are willing to "reward bad fiscal behavior," the more likely they are to become, as Glenn Stevens says in his speech "captured by their governments."
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