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Mistakes of Central Bankers and CBDCs

"You have to distinguish between the mistakes of the central bankers and the difficulties of implementing monetary policy in a system like the current one"

"The current inflation is a consequence of the mistakes made by the Central Banks in the management of monetary policy". This is the main conclusion of the study. “How central bank mistakes after 2019 led to inflation” published by NZI this summer.

It is an interesting contribution. to the debate on the causes of inflation and adds to other criticisms that are tarnishing the reputation of central banks.

I'm not going to get into that debate. But if I want to relate it to the purpose of this blog, which is to explain the advantages of using a risk-free asset as a means of payment instead of bank deposits, which are risky financial assets.

Because, even accepting that monetary policy has had a great responsibility in the current inflation, one would have to distinguish between the errors of the central bankers and the difficulties of implementing monetary policy. In the current system, more than 90% of the means of payment are not money from the central bank, but only "promises" to return that money.

In my book Goodbye to the Banks Some serious problems that arise when the means of payment are assets with risk are exposed. For example, problems for financial stability and problems of lack of competition in payment and credit services. but here alone I will highlight the difficulties of managing monetary policy.

One explanation for these difficulties is that central banks do not directly control money creation. Indeed, until the use of QE, the creation of money was decided exclusively by private banks. Central banks do not create money, but rather are forced to manipulate interest rates to indirectly affect the money creation provided by commercial banks.

Another problem with the current system is that central banks have no choice but to take maximum care of the financial health -liquidity and solvency- of banks so that problems of banking crises do not arise. This inescapable servitude limits their possibilities of acting. To give an example, they cannot use instruments such as those to create money and deliver it directly to citizens, because they would destroy the business of private banks.

Therefore, even in the caso in which it was proven that monetary policy has been a fundamental factor in current inflation, No. all responsibility should be assigned to the errors of the central bankers because much of the fracaso of monetary policy is structural. It is due to the characteristics of the current monetary system that prevent central bankers from employing direct monetary policy. In addition, many times the money-issuing institutes are forced to distort their monetary policy to avoid banking crises.

The study by NZI, which is a liberal New Zealand business lobby, is just one example of the criticism that is being affecting negatively to the reputation of central banks. These censures would not be worrying if they led to the conclusion that we should have a safe money system (CBDCs) as soon as possible in which the central banks would dedicate themselves exclusively to deciding monetary policy and would deliver the money created to the citizens.

in a system based on risk-free means of payment, it would still be necessary to find the most appropriate monetary policy to avoid price inflation and deflation, but monetary policy would be more effective. In addition, a system in which money is not an asset with credit or liquidity risk, would avoid worrying about banking crises and also would not generate the typical asset bubbles created by bank credit. Without forgetting a very important benefit such as that of totally separating monetary policy from the political work that is the responsibility of parliaments and governments.  

The central banks they shouldn't intervene directly in the markets where are interest rates formed. And, not just formally like now, they would no longer be the main financiers of the State budget.

But Unfortunately,  Some proposals to solve the problems that create central banks go in the direction  de eask them to adopt political decisions, such as collaborate in the fight against climate change or against inequalitiesas well as proposals for reduce their autonomy and increase the control of politicians – parliaments and governments – over monetary policy.

It is understandable that, in view of the important powers that central banks have today, they are asked to be used to achieve objectives such as the fight against climate change or the reduction of inequalities. But the best solution would be to let these decisions be taken in the political sphere and  leaving central banks exclusively the task of deciding monetary policy. With CBDCs, since it is not necessary to grant them powers to intervene massively in the markets, no one could ask them to use them to achieve political objectives.

For the same reason, it would be a great mistake to give politicians a greater role in managing monetary policy. Because, Of the characteristics that central banks have today, the most positive is precisely that, although monetary policy is a public task, it is not parliaments or governments that make monetary policy decisions.

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About the Author

Miguel A. Fernandez Ordonez

Miguel A. Fernandez Ordonez

State economist. Former Governor of the Bank of Spain and member of the Governing Council of the European Central Bank (ECB). He currently teaches Seminars on Monetary Policy and Financial Regulation at IEUniversity.

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