macroeconomics, central-bankI don’t want to discuss the reasons why it makes sense for a state to bail out private banks, like many Western states did after September 2008.
I’m just wondering why it is always the state, and not the central bank. In most Western countries, the management of the central bank reports in some way to the government, so the government could have ordered its central bank to print money and apply some sort of Quantitative Easing to bail out the most important banks.
Of course, this would have an inflationary impact, but during the last few years, inflation never was a real problem. On the other hand, the high deficits of most Western states are one of the biggest problems of today’s world economy (Euro crisis, US deficit).
Therefore it seems to me, printing money to save them banks would have been the better option than forcing the tax payer to pay the bill.
Thank you for any insights.
EDIT: I know, traditionally it’s the central bank’s responsibility to control inflation, and not to bail out banks. But I’m asking: Why did Barack Obama not call Ben Bernanke in September 2008? Why did the media not impose pressure on the Fed to bail out the banks?
And please, let’s isolate this question.
Note that in many countries, the Central Bank is given quite a large degree of independence from the government, though it is a public institution. That means it has a distinct and separate role and set of responsibilities.
A Central Bank typically has a very specific remit, such as keeping long-term inflation (CPI) within a narrow band ($\pm$1%) of the target (2%); it may also have a supervisory function over the financial sector.
Whether or not particular private entities are bailed out is a question of economic and industrial policy, rather than inflation-management, and so is typically seen as the remit of the government rather than the Central Bank. Note that this doesn’t have to be the case: it is conceivable that a Central Bank could take over a private bank, if its remit and the legal environment allowed.
The operational independence of the US Central Bank (the Federal Reserve) from the legislative function is written in law: so the bailout of some US institutions happened via government rather than via the Federal Reserve. In some currency areas, Central Banks acted to increase the liquidity and stabilise the balance sheets of some banks and financial mutuals during the 2007-2012 liquidity/solvency crunch, effectively bailing them out through access to cheap credit, by relaxing their rules on what they would accept as collateral.
Regarding the consequences of bailout, there are two very distinct questions:
In the UK, at least one of the bank bailouts of 2007-2010 is expected to be a net profit earner for the government: so in this case, that particular bailout will turn out to be deflationary. Others that generate net losses, may be inflationary. Either way, the bailouts prevented collapse of the entire financial system, and so were net positive for economic growth.
As @EnergyNumbers notes Central Banks are somewhat independent and indeed do bail out banks to some extent through their role as lender of last resort, which they may define with greater or lesser credit leniency.
That said, the main reason Central Banks do not bail out banks is because it could undermine faith in the currency. This is particularly problematic if the government has large levels of debt and are dependent on debt funding. Loosing the confidence of the stability of the currency will undermine faith in the stability of government bonds. As the real return of the government bonds becomes more uncertain these become less desirable. In essence the government paying for the bail-outs may be less costly for the government (and investment in the country in general) than a central bank bail-out.
That said, the Fed’s QE programs are basically transferring the bail-out from the government to the central bank, so the threat is more real in Europe, where government debt is already in question, than in the US (other euro complications aside).
I don’t want to discuss the reasons why it makes sense for a state to bail out private banks, like many Western states did after September 2008.
The short answer is that it doesn’t make sense to bail-out private banks.
I’m just wondering why it is always the state, and not the central bank.
The central bank is a branch of government. The central bank and the state are the same thing.
inflation never was a real problem.
Have you been paying attention to gas prices?
Therefore it seems to me, printing money to save them banks would have been the better option than forcing the tax payer to pay the bill.
They tax payer pays in both cases. Its just less obvious how in the former case. The government pays the private banks in what ever way is the most politically expedient, which is usually printing.
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