Inflation’s return changes the world

 BIS has stressed the dangers of ultra-easy monetary policy, high debt and financial fragility. 

Losses build up in institutions most exposed to property, interest rate and maturity risks. Over time, too, households are likely to suffer from higher borrowing costs. Banks whose equity prices are below book value will find it hard to raise more capital. The state of non-bank financial institutions is even less transparent.

So, how did we get into this mess?

BIS, “the extraordinary monetary and fiscal stimulus deployed during the pandemic, while justified at the time as an insurance policy, appears too large, too broad and too long-lasting”. I would agree on this. 

Where I disagree with the BIS is over whether “low for long” could have been avoided. It depends, too, on whether societies long unused to inflation decide that bringing it back down is too painful, as happened in so many countries in the 1970s. 

I remain unconvinced that the dominant aim of monetary policy should be financial stability. How can one argue that economies must be kept permanently feeble in order to stop the financial sector from blowing them up? 

If that is the danger, then let us target it directly. We should start by eliminating the tax deductibility of interest, increasing penalties on people who run financial businesses into the ground and making resolution of failed financial institutions work.

Martin Wolf 4 July 2023

https://www.ft.com/content/4c4133be-531f-49eb-90ab-fb9293727326

Big banks must become globally resolvable – or significantly ‘smaller’

 Aymo Brunetti Vox 1 May 2023

https://englundmacro.blogspot.com/2023/05/the-great-banking-houses-such-as.html