Centralized monetary authorities enjoy a privileged position in the current monetary system. People tend to view the economists and politicians at these institutions as demigods, individuals who if given enough resources will ensure that the economy continues an ever-advancing and smooth trajectory. However, unlike the Greek demigods of yore, today’s central bankers are mere mortals who must work within the confines and constraints of the institution that they head.
While they present an aura of invincibility, the truth is that the effectiveness of their policies faces severe limits.
Conventionally, a central bank pursues its goal of price stability by adjusting the money supply to alter the discount rate indirectly, thus making lending more or less attractive. The recent crisis draws attention to a secondary function of these banks — namely, as a lender of last resort. FULL ARTICLE by David Howden