The Mystic Hand: What Central Bankers Have Unlearned, Relearned, and Still Have to Learn

Central bankers have achieved unprecedented status due to the global financial crisis of 2008. This book traces the way in which central bankers learned, unlearned, relearned, and still have to learn the tricks of their trade. The lessons taught by nineteenth-century grands savants like Henry Thornton and Walter Bagehot were eventually neglected, leading to the policy mistakes that produced the Great Depression of the 1930s. When the financial crisis of 2008 broke out, central bankers summoned Thorntons and Bagehots wisdom and acted accordingly, saving the world from a repetition of the Great Depression. However, when the worst of the financial crisis and ensuing recession were over, central bankers continued applying unconventional monetary policies, which resulted in constant injections of liquidity. The Covid-19 pandemic has resulted in a relentless build-up of leverage and debt, speculative bubbles in different kinds of markets, undermined the willingness of political authorities to put their fiscal houses in order, stimulated a "zombification" of the economy and the growth of shadow banking activities, and contributed to growing inequality around the world. Central bankers are at a crucial turning point for the future of their profession, and even more for the future of our economy. New lessons have to be learnt to ensure our future depends on the right lessons.

Format: Hardback
Length: 224 pages
Publication date: 21 April 2022
Publisher: Surrey Books,U.S.

Over the past few decades, central bankers have achieved unprecedented status. Especially since the global financial crisis of 2008, the world holds its breath whenever they announce new policy interventions. Given the opaque nature of the money supply, in the eyes of most citizens, the "mystic hand" of central bankers is felt everywhere. Never before have central bank policies been so decisive, not only for financial markets but also for national economies and public welfare in general.

This book traces the way in which central bankers learned, unlearned, relearned, and still have to learn the tricks of their trade. The lessons taught by nineteenth-century grand savants like Henry Thornton and Walter Bagehot, once instilled, were eventually neglected. This led directly to the policy mistakes that produced the Great Depression of the 1930s. When the financial crisis of 2008 broke out, central bankers the world over summoned Thornton's and Bagehot's wisdom and acted accordingly. This re-learning saved the world from a repetition of the Great Depression. But when the worst of the financial crisis and ensuing recession were over, central bankers continued applying unconventional monetary policies—in some areas of the world, this even extended to negative policy interest rates and massive interventions in the bond markets, which resulted in constant injections of liquidity. Once the Covid-19 pandemic arrived, most central bankers doubled down on the intensity of these kinds of policies.

While the financial crisis required central bankers to act in decisive ways, it can no longer be denied that the consequences of these expansive monetary policies have become major issues. Central bank policies of the last decade and a half have resulted in significant economic and financial challenges.

One of the most significant consequences of these policies has been the increase in global inflation. Central banks have pursued expansive monetary policies to stimulate economic growth and combat the effects of the financial crisis. However, this has led to a rise in the price of goods and services, which has hit consumers and businesses hard.

Another consequence of these policies has been the increase in asset prices, particularly in the stock market. Central banks have kept interest rates low and provided ample liquidity to financial institutions, which has led to a surge in investment and speculation. This has resulted in a bubble in asset prices, particularly in real estate and equities, which has led to concerns about a potential economic bubble and a future financial crisis.

In addition to these economic consequences, central bank policies have also had social and political implications. The increase in global inflation has led to concerns about income inequality and social unrest. Some argue that the policies of central banks have benefited the wealthy at the expense of the middle and lower classes, as the increase in asset prices has led to a rise in wealth inequality.

Furthermore, the use of unconventional monetary policies by central banks has raised questions about the independence and accountability of these institutions. Some argue that central banks have become too powerful and that their policies are not subject to sufficient oversight or regulation. This has led to calls for greater transparency and accountability in central bank decision-making.

Despite these challenges, central bank policies have also had some positive effects. Central banks have played a crucial role in stabilizing financial markets and preventing a global economic meltdown. They have provided liquidity to financial institutions and supported economic growth through quantitative easing and other measures.

However, it is important to note that central bank policies are not without risks. The use of unconventional monetary policies can lead to unintended consequences and may not be sustainable in the long term. Central banks must carefully consider the potential risks and benefits of their policies and ensure that they are implemented in a way that promotes economic stability and social welfare.

In conclusion, central bank policies have achieved unprecedented status over the past few decades. While these policies have had some positive effects, they have also resulted in significant economic and financial challenges. Central banks must carefully consider the potential risks and benefits of their policies and ensure that they are implemented in a way that promotes economic stability and social welfare.

Dimension: 228 x 152 (mm)
ISBN-13: 9781572843066