Central banks need a Basel lll

By Hossein Askari and Noureddine Krichene

Central banks were created to manage liquidity with fiat money, to preserve the value of their currency and to safeguard the stability of their national financial system. Their mandate was to control monetary aggregates, reinforce safety regulations over banks, and promote a stable and predictable monetary framework. In the 1907 financial panic, as well as in earlier panics, uncontrolled money creation by banks had led to financial instability and runs on bank, resulting in extensive unemployment and bankruptcies.

Today, it seems that central banks have learned very little from history. Many have renounced their fundamental monetary mandate, have become political instruments, and have adopted a new mandate of managing the economy, promoting full employment and financing fiscal deficits. As a result, they have all but abandoned the control of money, credit, and supervision of the banking system, and have instead decided to control interest rates, which is after all a form of price control, with attendant inefficiencies and distortions. Read more…

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