Micro Managing Credit Allocation Is A Horrible Idea

Funding for Lending in the UK and loan-to-value restrictions in New Zealand are examples of central bank micro-management of credit allocation decisions.

They are both horrible ideas because they fail to consider unintended consequences and ignore economic history. Despite having a mandate for financial stability, what on earth does that actually mean? Does it mean that credit should stagnate? What does a “stable financial system” look like in an environment of dynamic economic growth?

The failure to think about moral hazard is negligent in the extreme. It is essentially shifting the blame for poor risk management from “the bank stuffed up” to “the central bank didn’t intervene in time”. Ridiculous!

I am skeptical of the idea that a central bank can accurately identify appropriate intervention points in the business cycle and deploy whatever tool they’ve chosen without enormous effects on behaviour in the economy they’re trying to “stabilise”.

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