One of the most important newspapers ran a story this week that senior officials at America’s Central Bank, the Federal Reserve, are of the opinion that the USA needs new regulations to “stop firms and households” from taking on “excessive leverage”, meaning too much debt.
They conclude that they need to be able to restrict excessive risk-taking like today when interest rates are kept so low for so long.
This is the worst type of double-talk imaginable from a Central Bank that is pumping money into the real economy by buying massive amounts of government and corporate bonds, as well as giving ultra-cheap money to banks. These are the same people who are responsible for keeping the financial system stable and keeping inflation at a reasonable level. That is their remit by law which they have clearly stopped doing.
They are the ones who are setting the rate of interest and this column has repeatedly said that the present regime of near to zero interest rates is nothing more than plain stupid. It has been going on for years in the USA, in Europe and in Japan, and that means that banks, big companies and wealthy folk can buy assets like bonds, shares and real estate with borrowed money that costs them next to nothing. It means that badly run companies can shore up their loss-making and poor results with cheap debt. It mean that households can get used to borrowing at next to zero percent without worrying about how they will repay their loans. It means that companies can borrow for mergers that are not well thought out, borrow to pay their owners dividends or borrow to arrange share buybacks. All of these activities have been going on in broad daylight for years since the financial crisis – and now the folks at the Central Bank appear to have woken up just now.
The Central Banks just need to operate according to their mandate and stop asking others to do their job. It is certainly not the job of politicians to fix interest rates, even though Trump seems to think that he is in charge!
The European Central Bank is also on the same road of madness with their president who prefers to finance Argentina-like countries with huge loans, even when they are totally unable to service them. Like Greece, Italy and Spain, all beneficiaries of ECB’s generosity, these countries are living off borrowed time.
Central Banks are not allowed to finance public (government) deficits but that is what they are doing and have been doing since the former EBC president said that he must do “whatever it takes” to keep the Eurozone rolling when the financial crisis arrived in 2008!
Interest rates are the cost of money and if that cost is zero or near to zero that of course there will be asset bubbles and we are heading for one big bang right now when the present bubble will burst. Covid-19 has destroyed many companies’ balance sheets for a few years to come and yet share prices on all the stock exchanges have been rising since last January from already high levels.