Someone has rightly said that, "The seeds of the next financial meltdown are sowed at the end of the previous one. "While the world economy is still recovering from the 2008 crisis, the central bank is pushing reforms that haven’t delivered results so far, and are rather backfiring in some cases.
Let us go back in time and have a look at the key events that led to the 2008 financial crisis. The 2008 crisis occurred due to the high influence of the Investment Banking forum over policy formation. For example, in the year 2000, Phil Gramm, the then Chairman of the Senate Banking Committee exempted derivatives from the Securities and Exchange Commission (SEC) and the SEC relaxed the net capital rule, which in turn helped the investment banks to increase the debt level substantially. These amendments were strategically executed in order to clear the way for Mortgage Backed Securities (MBS) and Collateralized Debt Obligation (CDO). CDOs were derivatives which were backed by home mortgage, commercial loans, student loans, car loans, etc. The banks blindly sold these securities without considering the consequences thereof, as these were highly risky ones. The people behind these changes had either worked in the investment banking industry or were planning to do so. A fine example was Ben Bernanke who had served Goldman Sachs in the Board of directors and later on became the Chairman of US Federal Reserve from 2006-2014.
The Federal Reserve has pumped money into the system in three phases in 2008, 2011 and 2013 and had a status quo till December 2015; when it first raised interest rates after almost a decade; with unemployment level just under 5%, growth rates around 2% and inflation less than 1%. The Federal Reserve is incapable to stimulate the overall economy rather has created a predicament of stagflation.
Mario Draghi, the governor of European Central Bank(ECB) has kept the interest rates in the negative territory and deposit rates to zero while he has not reduced the QE i.e. EUR 60 bn.-a-month bond buying programme for another six months until March 2017(which may be extended further). This was done to revitalise the Eurozone economy and tackle deflation but it is backfiring as they the growth is minimal and inflation is nearly zero. The recent BRexit along with the Greek crisis have created hurdles for growth in Eurozone and with discrepancies among monetary and fiscal policies, economic growth might be a distant dream.
Japan's nominal GDP was approximately the same in 2015 as it was 20 years earlier. The three tools- monetary stimulus, financial "flexibility" and structural change have acted as factors for its economic decline. Negative interest rates boost consumption and infuse liquidity through Qualitative Easing, yet its 2% inflation target has not seen the light of day. The people of Japan have preferred to delay or postpone consumption through savings, which has led to serious shortage of liquidity in the economy. The growth story of the 20th century is now a perfect example of how unconventional monetary policy has backfired, also known as ABENOMICS (which refers to the economic policies advocated by Shinzo Abe since the December 2012 general election, which elected Abe to his second term as Prime Minister of Japan. It is based upon "three arrows" of fiscal stimulus, monetary easing and structural reforms.).
HELICOPTER MONEY, a term coined by noble laureate Milton Friedman, is being implemented by the BOJ as it is squandering money to boost growth. The term “Helicopter money” refers to an alternative to Quantitative Easing (QE) when interest rates are close to zero and the economy remains weak or enters recession.
Central Banks in developed nations are adopting various unconventional monetary tools for growth, however, they are neglecting the repercussions it has on the developing nations. The Former RBI Governor Dr. Raghuram Rajan along with Prachi Mishra of RBI has written a paper titled Rules of the Monetary Game discussing that the developed nations should consider the repercussions of their monetary policies on the rest of the world, particularly the growing countries.
Hence, summing up the content, we can say that, although central banks are doing whatever they can to boost growth, they have not been able to deliver results. Rather, it has backfired in most cases as they have deployed almost every monetary policy tool at their disposal. Any trigger of the same magnitude as witnessed during the Bankruptcy of LEHMAN BROTHERS can invite another Financial Crisis.