The Center for Market Education ( CME ) recently held a webinar titled THE FUTURE OF CENTRAL BANKING , an event organized by CME in cooperation with Universiti Teknologi Mara ( UiTM ) – Sabah Campus , Asia-Pacific Students for Liberty and the Adam Smith Center ( ASC ) from Singapore ( Watch the recording below ).
The webinar was moderated by Dr Bryan Cheang ( founder of the ASC ) and introduced by Dr Carmelo Ferlito ( CEO of CME ) and Dr Firdausi Suffian from UiTM . The main speaker , instead , was Dr Daniel J . Smith , Professor of Economics at the Jones College of Business at Middle Tennessee State University ( USA ). In the occasion , the book MONEY AND THE RULE OF LAW ( authored by Peter J . Boettke , Alexander W . Salter and Daniel J . Smith , and published by Cambridge University Press ) was launched .
“ We are glad that we held this event now – explained Dr Carmelo Ferlito – a very peculiar moment for the Malaysian economy , in which incredibly expansive monetary policies and the following inflationary tendencies call for a reform of the role of our central bank ”.
During the webinar , Professor Smith highlighted three major problems with the contemporary way to do central banking , exacerbated by the actions taken during COVID-19 :
2 . Central Banks and the Moral Hazard of State and Local Bailouts : As state and local governments bailouts become an accepted central bank tool during a recession , we can expect the moral hazard problem to extend to state and local governments . State and local governments will have far less incentive to engage in responsible budgeting when it comes to their budgets , public pensions , rainy day funds , and other obligations if they can expect bailouts during a time of crisis .
3 . Central Banks as Executors of Fiscal Policy : In the pressure to do something immediately in a recession , central banks are becoming the primary executors of fiscal policy during a recession . Central banks are increasingly expected to compromise their primary mission of monetary stability by making major interventions in the economy beyond providing general liquidity . These interventions necessitate preferential credit allocation , giving unelected central bankers substantial power to choose winners and losers in the market .
1 . Central Banks and the Moral Hazard of Corporate and Financial Bailouts : As unconventional intervention into the economy through a central bank becomes the conventional practice of monetary authorities , market participants begin to expect this regular intervention anytime there is a downturn . This creates a moral hazard problem that incentivizes large corporations and financial institutions to incur excessive risk .
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