Financial Crisis: The Result of Expansive Monetary Policies

The current financial crisis would be the delayed result of a monetary policy that is permanently and unreasonably expansionary. The continued policy of low-interest rates, attached to financial innovations supported by the Ponzi scheme mechanisms, would be the source of troublesome underlying forces that allows subjects to arise from a crisis but accepts to enter another financial crisis, far along and in a different place.

It is the fight against the overwhelming effects of the technology bubble at the turn of the century, with excessive use of monetary expansion, which gradually produced the conditions for the crisis of the real-estate market in the United States during 2006 and 2007.

It is indeed the mixture of an excessively and durably expansionary monetary policy and the inevitable consequences of the Ponzi scheme, based on financial innovations, applied at structured products, which is answerable for the current market crisis.

This dynamic is therefore prompting, for the detonator, the expansionary monetary policy applied to fight against a past financial crisis. The conditions for its spread from one asset market to another are linked to financial innovations and Ponzi-scheme.

Under such circumstances, central banks must first escape chain responses leading to a systemic crisis of banks. Central banks are obliged to consequently inject the necessary liquidity to avoid bank defaults, if possible a credit crunch, but they must also escape revealing the conditions for generating the next crisis.

An economic policy could use many mechanisms other than short-term interest rates to fight excessive leverage or asset price bubbles, which mean higher reserve requirements on certain credit categories, management in the cycle of principal ratios of banks to prevent them from lending too easily during periods of economic expansion and rising financial markets and the taxation of certain capital gains.

The situation as such will feed on the maintenance of an expansionary monetary policy, which by facilitating the debt will lead to the overpricing of assets in the different markets. This overpricing leads to the emergence of a speculative bubble, which, by overflowing, requires liquidity to feed the market through an expansionary monetary policy.

In fact, in response to the newly emerging crisis, which is reflected in a sharp rise in corporate defaults, the US central banks, the Federal Reserve and the European Central Bank are pursuing very expansionary monetary policies. It is particularly the case in the United States, in order to neutralize the likelihood of a drying up of the credit market, though this policy, if it avoids the worst-case scenario in the short term, will overlay the way with about two years of the holdup, a strong outpouring in household debt, especially secured loan for real estate purchasing, then business. This increase in everyday mortgage debt fuels requests in the real-estate market, which inevitably raises property prices. Undoubtedly, the monetary authorities can no longer simply regulate inflation rates in the market for goods and services, but they still could take into consideration with great consistency the relative development of the indebtedness and prices of financial assets and properties.

Posted in ENG

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