Central Banks And The Problem With Playing God

Today’s Western institutions have long been deemed to be sacrosanct. As a matter of fact, though, nation-states are increasingly met with reservation or even outright resentment. Public trust in government is near historic lows, and pillars like the media or democracy are suffering from a loss of confidence.

But one modern institution seems to be standing as strong as ever: central banks. Although their role has changed significantly over the course of a few decades and their mandate has been infringed on more than once, they are still met with a high level of trust by financial experts, economic actors, and investors. With every looming crisis heating up, global liquidity is seeking refuge in government bonds and cash, while central banks are being called for immediate help.

This is all the more surprising when taking heed of the fact that central banks have been ballooning their balance sheets beyond any reasonable measure. While economists of all types been critically assessing today’s bloated central bank balance sheets, the general opinion seems to stand firm: central banks are without alternative, being the only actors that can stem the tide of economic and financial destruction. They have no choice but to intervene and bloat their balance sheets, the common understanding goes.

Provoking Controversy

Indeed, the reach and influence of central banks has never been higher, one could argue. Initially being lenders of last resort for banks, they have also mutated into dealers of last resort for all kinds of shadow banking institutions residing outside official banking regulation. Today the Fed and other central banks have to see to the stability of the entire financial system by catering to the liquidity needs of these shadow banks even though they have developed and grown outside the central banks’ purview. Many proponents argue that central banks are like the Fire Corps coming to quench the fire. And as the governor of the Bank of Canada has stated: “A firefighter has never been criticized for using too much water.”

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