Central banks are pushing on a string, Stephen Roach says

Although it remains to be seen whether the US central bank will follow the likes of the Eurozone and Japan into the realm of negative interest rates, central banking has lost its way and is in crisis, can the world economy be far behind? Stephen Roach asks in an article for Project Syndicate.

Roach, an ex-chief economist at Morgan Stanley, believes central banks are abdicating effective control over the economies they were entrusted to manage and that the move towards negative rates will only exacerbate financial stability risks and set the stage for the next crisis.

Moreover, the economist warns about the risk that politicians, drawing false comfort from the "frothy" asset markets that result from expansive monetary policies will be less likely to pursue fiscal stimulus, through increased government spending.

Yet by doing so they are repeating the mistakes made in the 1930s, when policymakers ended up trying to 'push on a string', he said.

To make his point, he references how real GDP growth in the single currency area has averaged just 0.1% over the course of the 2008-2015 period.

"The shift to negative interest rates is all the more problematic. Given persistent sluggish aggregate demand worldwide, a new set of risks is introduced by penalizing banks for not making new loans. This is the functional equivalent of promoting another surge of “zombie lending” — the uneconomic loans made to insolvent Japanese borrowers in the 1990s."