FAST FIVE: No Fix For Recession: Central Banks Are Trapped In More Ways Than One

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Nobody calls for interest rates to fall to zero in eras of moderate economic growth, for example; such extreme policies may well derail the moderate growth by incentivizing risk-taking and excessive leverage.

This leads to what I term credit/debt exhaustion: lenders can no longer find creditworthy borrowers, borrowers either don't want more debt or can't afford more debt.

Whatever credit is issued is gambled in speculations that the current bubble du jour will continue indefinitely– a bet guaranteed to fail spectacularly, as every speculative credit bubble eventually implodes.

Even worse, if the extreme policies fail to restore rapid growth and more importantly,confidence in future rapid growth, then ramping up extreme policies will be correctly interpreted as the desperate acts of clueless authorities. This will crush confidence and trigger the very crisis the authorities sought to forestall.

The Fed and other central banks are trapped in more ways than one.

Categories: ZH