Tags: Malpass | central | banks | rates

David Malpass: 'Central Banks Making Matters Worse'

By    |   Thursday, 22 January 2015 10:12 AM

Financial markets reacted positively to the $1.3 billion quantitative easing program announced by the European Central Bank (ECB) Thursday.

But David Malpass, president of Encima Global research firm and former adviser to Ronald Reagan, isn't too impressed with monetary stimulus programs around the globe.

"Central banks are ratcheting up their existing policies, making matters worse," he wrote in an article for Forbes before the ECB move.

"Extending the zero interest rate policy, one of the Fed's options, would be harmful because the zero interest rate freezes interbank markets and re-channels credit away from the economy's growth engines — new businesses," Malpass explained.

"The zero interest rate is a government-imposed price control. The result is a credit rationing process in which credit flows to well-connected borrowers at the low price but avoids new and small businesses."

Most economists expect the Federal Reserve to wait until at least mid-year to increase rates.

And what about quantitative easing?

"Having the central banks buy more bonds to fight deflation would also be harmful," Malpass says. "Bond buying distorts capital flows and distracts governments from the urgency of structural reforms."

When it comes to the Fed, Robert Greifeld, CEO of Nasdaq OMX Group, disagrees with Malpass. Writing in The Wall Street Journal, he warned the Fed against hurried action.

"Moving too quickly, amid persistent signs of global economic trouble, could have a damaging effect on economic growth and investors by sending stock and bond markets into turmoil," Greifeld noted.

The eurozone, Japan and China have reported varying degrees of economic sluggishness in recent months.

"Continued caution on U.S. interest rates is the right path," he argued. "With persistent uncertainty in the global economy, we cannot afford additional economic stress that causes further retrenchment of the investing public."

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Financial markets reacted positively to the $1.3 billion quantitative easing program announced by the European Central Bank (ECB) Thursday.
Malpass, central, banks, rates
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2015-12-22
Thursday, 22 January 2015 10:12 AM
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