Practical analysis for investment professionals
09 January 2014

Central Banks and Systemic Risk (Online Forum)

Posted In: Economics

On the heels of the financial crisis of 2007–2008, there has scarcely been a more hotly debated topic than central bank monetary policy. From the US Federal Reserve to the European Central Bank to the Bank of Japan to other central banks the world over, virtually all countries have been engaged in extraordinary monetary measures which bring to the fore a host of questions. For example, given the entirety of central bank activities, what is their role in creating or reducing systemic risk on balance? Do they create the instability they claim to protect us against? Or, do they serve a vital public interest?

On one side of the debate is a loud chorus of complaints that government bailouts have encouraged moral hazard, quantitative easing is creating large distortions throughout the entire economy, and that low rates are creating both credit and asset bubbles and preventing the underlying economy from healing. On the other side of the debate are adamant claims that government actions — and particularly those of the central banks — saved the world from another Great Depression, have stimulated the economy, and have supported job creation. Who’s right? Has central bank policy indeed saved the world? Or did it cause this mess in the first place? Or are we lost within a supercycle whose risks haven’t been fully born out yet? Is there a better way? At the very bottom of it all lies a fundamental question: Do central banks create or reduce system risk?

Weighing in on these vital questions is a blue-ribbon panel of experts assembled by CFA Institute for a panel discussion titled “Central Banks and Systemic Risk.” Our distinguished panelists include: Paul Brodsky; James Grant; David M. Jones; William Poole; and Jim Rickards. Join us here on the Enterprising Investor, 14–16 January 2014 for a moderated discussion as we explore the function and purpose of the global monetary system.

As moderator for the discussion, I will also be fielding your questions. To submit a question simply ask your question in the comments section below. We look forward to your participation and a great discussion!

Paul Brodsky (@pebrod)

Brodsky is the former co-founder and managing member at QB Asset Management (QBAMCO), which recently merged with Kopernik Global Investors, where he is a portfolio manager. Mr. Brodsky began trading on Wall Street in 1982 and has managed investment funds since 1996. He publishes macro market research for professional investors.

James Grant (@GrantsPub)

Grant is the founder and editor of Grant’s Interest Rate Observer, as well as author of numerous books, including the acclaimed Mr. Market Miscalculates: The Bubble Years and Beyond (2008).

David M. Jones (@dmjadvisorsllc)

Jones is president and CEO of DMJ Advisors, a Denver-based consulting firm. He is also an executive professor of economics at the Lutgert College of Business at Florida Gulf Coast University and has served as a consultant for Mizuho Securities Company.

William Poole (@elk_guy)

Poole is a former president of the Federal Reserve Bank of St. Louis and member of the Federal Open Market Committee. He is currently a senior fellow at the Cato Institute, senior advisor to Merk Investments, and, as of fall 2008, distinguished scholar in residence at the University of Delaware.

Jim Rickards (@JamesGRickards)

Rickards has held senior executive positions at sell-side firms (Citibank and RBS Greenwich Capital Markets) and buy side-firms (Long-Term Capital Management and Caxton Associates) as well as technology firms (OptiMark and Omnis). Since 2001, he has applied his financial expertise to a variety of tasks for the benefit of the US national security community and the Department of Defense.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Ron Rimkus, CFA

Ron Rimkus, CFA, was Director of Economics & Alternative Assets at CFA Institute, where he wrote about economics, monetary policy, currencies, global macro, behavioral finance, fixed income and alternative investments, such as gold and bitcoin (among other things). Previously, he served as SVP and Director of Large-cap Equity Products for BB&T Asset Management, where he led a team of research analysts, 300 regional portfolio managers, client service specialists, and marketing staff. He also served as a Senior Vice President and Lead Portfolio Manager of large-cap equity products at Mesirow Financial. Rimkus earned a BA degree in economics from Brown University and his MBA from the Anderson School of Management at UCLA. Topical Expertise: Alternative Investments · Economics

10 thoughts on “Central Banks and Systemic Risk (Online Forum)”

  1. Per Kurowski says:

    In 1999 in an Op-Ed I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

    And in 2003 in al letter published by Financial Times I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is.”

    And bank regulators foolishly decided that the capital requirements of banks, those which are set to cover for “unexpected losses”, were to be determined by the same information used to estimate “expected losses”. And with that they introduced a systemic error that not only makes it impossible for banks to allocate credit efficiently in the real economy, but also makes certain that when a bank crisis explodes, banks will have less capital than normal to cover up with.

    And this distortion has been ignored by the Central Banks and by basically the whole academic financial community.

    I am curious to see whether this is even mentioned in the forum.

  2. Jimmy says:

    Just one question – how do the central banks intend to mop up the excess liquidity in the system that is currently distorting asset and commodity prices?

  3. robert jenkins says:

    Central Bankers target inflation but measure it in terms of CPI. Asset price inflation is largely ignored except and until it is believed to be spilling into inflation expectations. In your opinion, are Central Bankers ignorant of the current global asset price inflation or consciously ignoring it? Should they?

  4. Is it necessary to still have a Federal Reserve Bank? According to my research if every taxpayer in the US paid $25 we could pay-off the Fed’s debt and the remainder income tax can go directly into the US treasury. Yes, its unfair to charge this generation money for past generations mistakes, but is this not better than simply paying on the interest, however low it may be? Also, on the issue of banking reform, given our current monetary system, what would you suggest in order to produce a more stable economy? Where do you see the global economy in 2030?

    1. CORRECTION: $10,000 per taxpayer. Would this be a plausible option?

  5. Manasseh Ngichu says:

    The biggest issue with the monetary system in the world is the political influence that is normally ocherstrated by rich individuals. if I am worth several trillion dollars it means my net worth is higher than the GDP that of many countries. The policies that I want implemented will pass simply because I fund the country’s top political campaigners, whoever gets to power has to pay the pipper, they will implement policies that are dear to me. If greed is near to my heart then it means the policies I will want implemented will push for me to earn more money, the biggest problem with money is that it’s insatiable, it doesn’t come with diminishing returns, so the more I have the more I want. Most controlling intreast in any countries seek to first protect their wealth and secondly increase it.

    Most of the the financial regulatory institutions are nowadays toothless dogs that can bark all day but can’t bite. You’ll find multi national coperations, banks, hedge funds, insurance companies, mortgage lenders etc run the puppet governments and for external policies especially in third world countries they will give ‘aid ‘ that comes with policies that aid them generate more wealth.

    Is there any hope? Thus far it’s bleek, the light at the end of the tunnel for sure is a rich mans train coming to run over what is left from the common folk. If we can separate politics and the financial systems, maybe just maybe there’s hope, otherwise we wait for Jesus

  6. Kedarnath Aundhekar says:

    It will be interesting to note the impact of loose money provided by Fed during last 5 years, How much money was useful to US businesses and how much money was transferred to emerging markets in search of better yields?

    Fed may not have created systematic risk in US markets, but it definitely played a bigger role in overheating emerging markets. Isn`t is a kind of systematic risk?

  7. Hey, thanks for your comments and interest everybody! We have a number of additional items on our agenda, but I will try to weave at least some of your questions into the body of our conversation. So, please keep the questions coming and we will try to accommodate.

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