Richard Werner:

In reality, central bank decision-makers led by the Fed were largely responsible for the Great Inflation of the 1970s. They adopted “easy money” policies in order to finance massive national budget deficits. Yet this inflationary behaviour went unnoticed by most observers amid discussions of conflict, rising energy prices, unemployment and many other challenges.

Most worryingly, despite these failings, the world’s central banks were able to continue unchecked on a path towards the unprecedented powers they now hold. Indeed, the painful 1970s and subsequent financial crises have been repeatedly used as arguments for even greater independence, and less oversight, of the world’s central banking activities.

All the while, central bank leaders have repeated the mantra that their “number one job” is to achieve price stability by keeping inflation low and stable. Unfortunately, as we continue to experience both punishing inflation rates and high interest rates, the evidence is all around us that they have failed in this job.

The latest crisis – beginning with the sudden closure of Silicon Valley Bank (SVB) in California – is a further indication that inflation, far from being brought to heel by the central banks, is causing chaos in the financial markets. Inflation pushes up interest rates, which in turn reduces the market value of bank assets such as bonds. With SVB’s many corporate depositors not covered by deposit insurance and fearing regulatory intervention, a catastrophic run on this solvent bank was triggered.

When the establishment of the Fed was proposed more than a century ago, it was sold to Congress as the solution to this vulnerability in retail banking, as it could lend to solvent banks facing a run. In the event, the Fed did not lend to some 10,000 banks in the 1930s, letting them fail, and this time around it did not lend to SVB until it was closed and taken over.