Getty Images

The Year Ahead 2018

Will Monetary Policy Trigger Another Financial Crisis?

Sustained unconventional monetary policies in the years after the 2008 global financial crisis created the conditions for the second-longest bull market in history. But they also may have sown the seeds of the next financial crisis, which might take root as central banks continue to normalize their policies and shrink their balance sheets.

LONDON – Former US President Ronald Reagan once quipped that, “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.” Put another way, policymakers often respond to problems in ways that cause more problems.

Consider the response to the 2008 financial crisis. After almost a decade of unconventional monetary policies by developed countries’ central banks, all 35 OECD economies are now enjoying synchronized growth, and financial markets are in the midst of the second-longest bull market in history. With the S&P 500 having risen 250% since March 2009, it is tempting to declare unprecedented monetary policies such as quantitative easing (QE) and ultra-low interest rates a great success.

But there are three reasons for doubt. First, income inequality has widened dramatically during this period. While negative real (inflation-adjusted) interest rates and QE have hurt savers by repressing cash and government-bond holdings, they have broadly boosted the prices of stocks and other risky financial assets, which are most commonly held by the wealthy. When there is no yield in traditional fixed-income investments such as government bonds, even the most conservative pension funds have little choice but to pile into risk assets, driving prices even higher and further widening the wealth divide.

To continue reading, please subscribe to On Point.

To access On Point, log in or register now now and read two On Point articles for free. For unlimited access to the unrivaled analysis of On Point, subscribe now.


Log in;
  1. Donald Trump delivers his address to a joint session of Congress  Bill Clark/CQ Roll Call/Getty Images

    Trump’s Abominable Snow Job

    • In the 2016 US presidential election, Donald Trump presented himself as a populist who would protect America’s “forgotten” workers from the disruptions of trade and immigration and the nefarious designs of unnamed elites.

    • But, a year after assuming office, it has become abundantly clear that “America first” means workers come last.
  2. Project Syndicate

    PS Commentators’ Best Reads in 2017

    • For the first time, Project Syndicate has asked its contributors what they’ve been reading, and why. 

    • Their choices may surprise, but surely will not disappoint, readers seeking the most important books on history, politics, economics, as well as more than one novel.