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What was the role of central banks during and after the 2008 credit crisis, and how does this affect today's banking crisis? The credibility of central banks is at stake because the mistakes made at the time did not prevent or resolve the crisis.
At the time, the crisis was triggered by a U.S. housing crisis, followed by a global banking crisis. Central banks, including the Federal Reserve, did not foresee, understand or resolve this crisis. However, the unorthodox monetary policies that have been pursued since then, such as the massive purchase of government bonds and other loans, have created new problems. Unexpectedly high inflation and interest rate hikes since the beginning of 2022 have shaken the financial system. Moreover, the geopolitical context has changed, making the situation less controllable and the world seems to be fragmenting into power blocs with different interests.
Central banks played an important role in both the 2008 credit crisis and the current banking crisis. At the time, they did not see the crisis coming and took the wrong measures. In addition, central banks have little control over international capital movements, which has created a shadow banking sector that is not supervised by them. This became clear during the credit crisis of 2008.
Central bank policy has created an environment in which the market assumes that risks can always be passed on to central banks' balance sheets. This has led to major financial instability and a huge speculative wave in real estate, stock markets and loans. Governments have come to rely on the deep pockets of central banks to keep issuing money.
The credibility of central banks was at stake when capital market interest rates began to rise rapidly in response to rising price inflation. Central banks were unable to eliminate the causes of high price inflation, which led to a misguided policy in their policies. The current banking crisis is more dangerous than the credit crisis of 2008, because the global economy is weaker and the mother of all bubbles, that of government bonds, is faltering. The current banking crisis also has geopolitical implications. China, which stimulated the global economy in 2008, is not expected to do so again.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
