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Whose fault is fiscal dominance? - Robert Armstrong - Unhedged - FT

In other words: because central banks protected markets from the consequences of reckless government spending and correspondingly high leverage in the financial system, government spending and financial leverage have increased further. The system is now so precarious, and the consequences of a collapse so great, that the Fed has no choice but to intervene whenever the markets start to twitch. The moral hazard only gets worse; that’s the trap. 

This view is most relevant in the context of overnight borrowing markets (as Unhedged discussed here and here). The “ample reserves” regime referred to above is the amount of financial system liquidity that allows the Fed to control overnight rates despite the upward pressure on those rates from the massive amount of leverage in the system. But it is sometimes hard to distinguish controlling short-term interest rates, which is monetary policy, from suppressing volatility by cramming cash into the system because otherwise the whole overleveraged monstrosity might explode, which is just an attempt to clean up your own mess. The perverted aspect of all this, my correspondent argues, is that the target of monetary policy was meant to be the real economy. Now the target is and has to be the financial system.

Whose fault is fiscal dominance?

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