Economist denounces ‘class war’ of central banks

Under the direction of the US Federal Reserve, central banks around the world have had a unified philosophy over the past year: Reduce inflation at all costs, even if it means painful adventure for people and businesses. But that approach has been questioned more than ever this month after a number of famous bank crashes United States And Europe. Now, a British economist who predicted the 2008 global financial crisis has escalated the issue, saying that central banks prefer “class warfare to financial stability.” .

The Fed and other central banks have emphasized tight labor market and high wages are the main underlying cause behind inflation. But while the job market easing may help cool the economy, it also means layoffs, unemployment and the possibility of a recession – a risky trade-off. and unacceptable to some critics.

“[C]The bureaucrats at the top of central banks appear willing to sacrifice private banks and global financial stability in a rush to raise interest rates, crush demand, discipline workers and shrink contractions. national income,” said Ann Pettifor, a British economist and frequent economic adviser who predicted the 2008 global financial crash with a book before 2006 about the debt piled up around the world, Written in her Substack newsletter on Sunday.

“In other words, their effective priority is class warfare over financial stability.”

“Hard to face what central banks are doing”

Silicon Valley Bank received much of the criticism for its demise earlier this month, with many slam its managerbut the Fed also played a role in its downfall.

The Fed is accused block any phrase about regulatory mistakes that could lead to the bank’s collapse when the government announced the SVB bailout. The failure of SVB is also tied to their asset depreciating over the past year when the Fed abruptly left the near-zero interest rate environment. That made SVB particularly vulnerable to liquidity crisesand other banks are in a similar position.

“The reality is that I find it difficult to deal with what central banks are doing, not just by raising interest rates, stifling demand and reducing wages,” Pettifor wrote. “Due to a lack of analysis, regulation, oversight and foresight—central banks showed last week that they are willing to use high interest rates to risk and even cause bank failures and real estate disruptions.” global financial stability.”

She also criticized the European Central Bank for keep abreast of last week’s big interest rate hikes despite the recent bank collapse in the US Credit Suisse failed just a few days laterand purchased by USB at an emergencyI was brokered by the regulator.

Pettifor continues to refer an interview between former Treasury Secretary Larry Summers and comedian and political commentator Jon Stewart aired last week. Summers insists that raising interest rates and tackling inflation at all costs is the right path, while Stewart challenges him about the overwhelming role corporate profits play in fueling inflation, which has received so much little interest from the Fed.

Pain for workers and lower income groups has been described as a necessary evil in the fight to reduce inflation by Fed Chairman Jerome Powell and other prominent economists, such as summer. But the labor market-targeted approach to reducing inflation has also been widely criticized around the world. Governor of the Bank of England Andrew Bailey has slam last year for asking British businesses to practice “restraint” in salary-rise negotiations. More recently in the US, Powell’s method has been criticized for financial instability with this month’s banking crisis and finally put the burden of reducing inflation on workers.

Pettifor is not the only voice criticizing how central banks are risking their economies into a financial crisis. Political figures in the United States, mainly of the progressive left, include senators Elizabeth Warren and Bernie Sandersalso criticize Powell and the Fed for risking pushing the economy into recession and pushing millions of people into unemployment. Warren has been at the forefront of attacks, said on Sunday that Powell had “failed” at his job and should no longer be chairman. She has long criticized Powell for the risks that high interest rates pose to the labor market, warning earlier this month that the Fed could put as much as possible. two million Americans jobless at the end of its current tightening cycle.

Rising interest rates and slowing the economy tend to hit workers hardest, especially low-wage ones, by causing layoffs and slow wage growth. Robert Reich, former US Secretary of Labor, writes in an op-ed because Guard last year just before the Fed started its tightening cycle.

Sure, inflation was a driving concern for Americans since last year, often more than any other problem. Last month, 13% of Americans cited inflation as their biggest concern right now, while only 1% mentioned wages. according to Gallup.

Inflation has been a major burden on Americans of all incomes since prices began to climb in 2021. This is especially painful for low- and middle-income Americans, who had to Dive deep into their savings to cope with soaring food, energy and home prices. Inflation also makes it difficult for high-income earners, as more than half of high-income Americans are now enough to live from salary to salary.

But the Fed’s focus on inflation – and in particular the tightening of the labor market that Wharton professor Jeremy Siegel earlier this month called “arbitrary“—may be ignoring some of the key points behind the price increase. A study in 2022 from the left-wing Economic Policy Institute found that more than half of price increases for goods and services can be attributed to larger profit margins among corporations, while only 8% of inflation is attributable to due to higher labor costs.

surround speak CNBC This month, since the start of the COVID-19 pandemic, workers’ wages have grown more slowly than inflation, and it is “hard to argue” that labor costs are the main cause of inflation. .

Regarding the Fed’s larger inflation outlook, some economists include Mohamed El-Erian argued that the 2% target was outdated and that achieving it would lead to severe economic harm, while a “higher stable inflation rate” of about 3% to 4% might be appropriate. than.

It is unclear whether recent banking failures and pleas from the left will cause Powell to abandon his pledge to reduce inflation at any cost, although Fed officials will provide a clear direction. when they meet on Wednesday to discuss the size of the next rate hike.

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