Video: Stephen Roach: Central Bankers Pulling the Wool Over Our Eyes with ZIRP and Magical QE

[hat tip ZeroHedge]

In the interview with Bloomberg’s Tom Keene at Davos, Morgan Stanley Asia’s Stephen Roach is right to point out that central bankers have been pulling the wool over our eyes with ZIRP and magical QE, which for him does little to sustain economic recovery, and that central bankers have been mired in a policy trap—or commitments to up the ante on current policies to produce short term outcomes.

However Mr. Roach eludes the political aspects of why central bankers have been pulling the wool over our eyes with these monetary nostrums, which palpably has been designed to save the skins of bankers and their political patrons.

And Mr. Roach glosses over the fact that current monetary panacea, which have brought upon the 2008 crisis and which continues to linger today, has real effects to the economy, through accretion of imbalances or malinvestments which engenders another bust down the road. What this means is that boom bust cycles has distortive effects to a large segment of an economy.

Also policy traps are representative of the priorities of typical political agents.

Mr. Roach speaks highly of China’s fine tuning of monetary policies, which he believes the recent gamut tightening measures has been effective enough for the Chinese authorities to allow for policy accommodation under current conditions. Mr. Roach also hopes to see central bankers imbue on the traits of ex-US Federal Reserve chair Paul Volcker. Lastly Mr. Roach says that capitalism built on Greenspan’s policies had been misplaced.

I am sure that Paul Volcker is an exception to the norm, given the environment of the yesteryears, but am not sure if Paul Volker today would apply the same set of policies. In short, I am sceptical of the time consistency of Paul Volcker’s policies.

Further given that Chinese authorities has been operating on Keynesian guided policies, then same boom bust cycles will apply. So far real pool of savings in China has deferred on the day of reckoning, but current policies which extrapolate to capital consumption will eventually expose these imbalances.

Lastly with due respect to Mr. Roach, central banking, or the politicization of money, does not in any way embody capitalism. Remember half of every transactions facilitated by legal tender imposed medium isn’t one determined by the markets but by government.

And neither does Greenspan’s unregulated financial system which has been anchored on manipulating interest rates and bailouts, and whose regulations has been gamed by the political and banking class.

Capitalism does not prevent market from clearing excesses, but to the contrary induces such dynamics. The persistency of the 2008 crisis, which extends today, has been due to policies which has been preventing the required adjustments from previously acquired malinvestments and distortions.