The government-controlled monetary regime – the most destructive force set into motion by state interventionism – has finally been blown to pieces. This is the message conveyed by the monetary fiasco in global capital markets, typically referred to as the international credit crisis.
However, politicians and central bankers the world over are taking great efforts to hide this truth and its full consequences from the public’s attention by taking recourse to even more far-reaching market interventionism.
Central banks provide commercial banks with any amount of base money needed to prevent them from defaulting on their payment obligations. The Federal Reserve, for instance, keeps expanding the monetary base at the highest rate seen since 1919 (see graph below).
The Federal Reserve has started monetizing various types of paper assets. As a result, the Fed’s balance sheet volume rose from US$909 billion to US$2,189 billion from the end of August 2007 to the middle of November 2008, much of it reflected by a considerable rise in deposits held by depository institutions, the US Treasury, and others with the Fed (see graph below).
What is more, not only the Federal Reserve but virtually all other major central banks have cut interest rates sharply to cheapen funding costs for commercial banks and borrowers in general (see graph below). By pushing official interest rates down, central banks hope to unfreeze credit markets, support asset prices, and keep the economies on an expansion path.
January 9, 2009
