For those who might be interested I found another source of the central bank inflation credibility and other assorted inflation obsession rhetoric here.
[BIS] General Manager’s speech: It’s time to address the root causes
Speech delivered by Mr Jaime Caruana, General Manager of the BIS, on the occasion of the Bank’s Annual General Meeting, Basel, 24 June 2012.
I don’t know if this started with Bernanke or if he is just a stooge for BIS, but in reading this speech I heard an echo of Bernanke’s public statements over the last couple of years.
To make this a short post, I will leave you all to read it for yourselves and make up your own minds about what it means, because I am now feeling rather melancholy about the prospects of pounding the need for a different course of action (compliance with the law would be a good first start) into Bernanke’s thick skull any time soon.
And since Scott Sumner asked what the “risks” to doing the appropriate things with monetary policy might be, to which Bernanke often refers without specifying, I will quote what it says here because there is really no point in waiting for someone at the Fed offer the typical echo when we can read it all here and weep about why any of these things are more important than all of the people who are being destroyed as a result of such incompetence.
As the benefits of extraordinary monetary easing shrink and become less certain, the risks of expanding central bank balance sheets are likely to grow. Such hazards may materialize in ways that are not completely clear today. I would underline three major risks.
The first is that prolonged monetary stimulus makes the necessary fiscal and structural adjustments seem less urgent. With cheap funding from the central bank, market signals may be obscured. Borrowers may overestimate their repayment capacity. Commercial banks find it easier not to adjust. The fiscal authorities may be tempted to delay consolidation. The absence of adjustment could increase dependence on central banks and accentuate the pressure on central banks to do ever more.
Second, the financial stability risks of protracted low interest rates could be significant. Earning capacity in the financial sector may be undermined, and financial firms, squeezed by low returns, may place riskier bets but not necessarily where credit is most needed. Large interest rate exposures in the financial industry may, one day, be used as an argument for holding interest rates down.
A third risk is that policy could be mis-calibrated or mis-communicated. The unprecedented size of their balance sheets has brought central banks into uncharted territory. With no history to rely on, they will find it difficult to calibrate and implement the tightening of monetary policy that will inevitably be required. Excess bank reserves could translate into a significant, sudden and unanticipated expansion of bank credit. Central banks have the technical tools to withdraw excess reserves. But there is always the risk of pressure to keep interest rates low or of a simple failure to see in time the need to tighten. Even if these dangers are successfully avoided, communicating with the public in a convincing way will still be very challenging in such unprecedented circumstances.
Finally, if markets come to see monetary policy decisions as constrained by the growing financing needs of government, the ability of central banks to control inflation would, at some point, be seriously compromised. Fiscal consolidation is therefore essential not only to restore fiscal sustainability, but also to preserve the credibility of monetary policy. This credibility, built up over the past two decades, has proved its worth during the crisis. It must not be squandered.
So it is reassuring that central banks have continued to emphasize that their exceptional measures have not weakened their commitment to price stability. The vital importance of this core mandate means that central banks cannot assume the responsibility for all economic goals.