Central Banks’ Crusade Against Risk

Of course, there is nothing wrong with this development per se, were it not for the fact that the decline in risk perception does not come naturally, but has been orchestrated by central banks’ many interventions in the credit and financial system. In particular, by artificially lowering market interest rates, central banks have triggered a “boom”, which produces pretty-to-look-at official data (on GDP, investment, employment, and such), but which is, and unfortunately so, built on quicksand.

The boom will only continue if and when market interest rates remain at suppressed levels, or are lowered even further. For if interest rates were to rise, various investments would turn out to be unprofitable; loans would default; banks would run up losses and rein in their credit supply; unemployment would rise; and so on. In other words: Higher interest rates would turn the boom into bust, for they would actually collapse the production and employment structure that has been nurtured by a policy of extremely low-interest rates.

This is why central banks are most likely to continue with their “crusade against risk.” That is, they will very likely keep their interest rates at current low levels for a very long time or will, where it is still possible, lower them even further. For how long can this go on? Presumably, no one knows for sure. At least on a scientific basis, it is impossible to forecast when the crisis will hit when the current boom will turn into bust. It might be a bitter pill to swallow, but it goes well beyond the science of economics to make any such predictions.

In view of central banks having effectively taken full control of the credit market, however, the odds are now that the boom will go on longer than many observers presumably suspect. For if central banks succeed in keeping a lid on market interest rates, a very important correction mechanism that could potentially turn the boom into bust – and that is a return of market interest rates to ‘normal levels’ – is effectively switched off; central banks’ crusade against risk proves to be devilishly efficacious indeed.

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