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Central Banks and the Looming Financial Reckoning

In the years between the start of the Great Moderation in the mid-1980s and the 2007-08 financial crisis, advanced-economy central banks failed to give sufficient weight to financial stability.

The economic and social cost of a financial crisis, especially with private and public leverage as high as it is today, would dwarf the cost of persistently overshooting the inflation target. 

If preventing a financial calamity requires a few years of high single-digit inflation, the price is well worth it.

China’s real-estate bubble—and the household debt secured against it—is likely to implode sooner or later. 

Across the advanced economies risk assets, notably equity and real estate, appear to be materially overvalued. The only way to avoid this conclusion is to believe that long-run real interest rates today (which are negative in many cases) are at or close to their fundamental values.

I suspect that both the long-run real safe interest rate and assorted risk premiums are being artificially depressed by distorted beliefs and enduring bubbles, respectively. If so, today’s risk-asset valuations are utterly detached from reality.

Whenever the inevitable price corrections materialize, central banks, supervisors, and regulators will need to work closely with finance ministries to limit the damage to the real economy. Significant deleveraging by all four sectors will be necessary

Willem H. Buiter MarketWatch 5 October 2021


Central Banks and the Looming Financial Reckoning

WILLEM H. BUITER Project Syndicate Oct 4, 2021


Excellent about Bitcoins. Tulips, England’s South Sea Company and France’s Mississippi Company

 “Leverage is the killer,” Willem Buiter said.


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