Central banks in the west, in particular the Federal Reserve have been under attack from critics for keeping interest rates too low for far too long and using unconventional monetary policy tools. In this piece, The Economist reviews too books that represent the views of the critics and the central banks in contrast. First, ‘The Price of Time’ by Edward Chancellor, most famously known for his books on financial history but also as someone who worked in the investment industry as a banker and asset allocator. Chancellor plays the role of the critic attributing much of today’s problems from financial excesses to inequality to the ultra-loose monetary policy of central banks. He is pitted against the former Federal Reserve Chairman Ben Bernanke’s ‘21st Century Monetary Policy’, which defends his actions, indeed argues he did not do enough given the long elusive employment and inflation targets. The Economist declares the latter as the winner with more coherent arguments whilst labelling Chancellor’s as a ‘jumbled collection of every criticism to have been levied at low interest rates’.
The article introduces Chancellor’s central argument as “Humans prefer jam today to jam tomorrow. Interest rates are the reward for deferring gratification, for renting out money that could have been spent today. When rates fall too low, grave consequences follow: financial instability, higher inequality and pain for savers.”
Whereas it sums Bernanke’s defence in the savings glut the world has seen off late: “the ultimate determinant of interest rates is the global balance between savings and investment which, over time, exerts a magnetic pull on central bankers trying to hit inflation targets. Rates have been low in part because desired savings have risen as societies have aged.”
The article argues “Mr Bernanke’s framework is more compelling than Mr Chancellor’s, as low or even negative interest rates can co-exist with humanity’s natural short-termism. Suppose someone has a wage income of 100 in their working life and zero in retirement. Though they may not target a 50/50 split, they will save to avoid penury. Lots of people building up a nest-egg—even one that is small relative to their working incomes—creates an imbalance that can, as a result of market forces, push rates lower than their discount rates. “Justice is violated when lenders receive little or nothing,” Mr Chancellor writes. He might as well rage against a population pyramid.”
“Messrs Chancellor and Bernanke do agree that low rates increase financial risk-taking, for reasons that economists do not fully understand. In theory, low rates should make credit cheaper uniformly; in reality, the riskiest borrowers benefit the most. But whereas Mr Chancellor sees this as sufficient reason to raise interest rates even when the economy is weak, Mr Bernanke sees it as an issue that is too little understood to form the basis of a monetary policy. Should the Fed ever raise rates to try to contain financial excesses? “In principle, yes,” says Mr Bernanke. “But in practice, very cautiously and not very often.”
Hence there is an amusing contrast between the books’ assessments of loose monetary policy after the global financial crisis. Mr Chancellor blames it for almost any ill he can identify in the American and world economies. Mr Bernanke regrets not having stimulated more, given how much the economy subsequently undershot the Fed’s employment and inflation targets. Again, it is Mr Bernanke’s account that is more convincing—for the simple reason that critics of loose money in the 2010s repeatedly predicted severe instability that never came. It took the pandemic to cause markets to crash in the spring of 2020.”
Given both books likely have been written before the current bout of high inflation, neither makes a compelling argument on either side on the subject.
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