Central banks have become the dominating force in financial markets.
Easing and tightening decisions move all assets from bonds to private equity. Their role is supposed to be to control inflation, provide price stability, and ensure normal market functions. However, there is little evidence of any success in achieving their goals. The era of central bank dominance has been characterised by boom-and-bust cycles, financial crises, policy incentives to increase government spending and debt, and persistent inflation. Recently developed economies’ central banks have taken an increasingly interventionist role.
The creation and proliferation of central banks over the past century promised greater financial stability. Nevertheless, as history and current events continually show, central banks have not prevented financial crises. The frequency and severity of these crises have fluctuated but have not declined since central banks became the leading figure in financial market regulation and monetary interventions. Instead, central banking has introduced new fragilities and changed the nature, but not the recurrence, of financial turmoil.
Empirical evidence dispels the myth that central banks ended the era of frequent financial crises. Regardless of central bank oversight, a credit boom preceded one in three banking crises. Who created those credit booms? Central banks, through the manipulation of interest rates. According to Laeven and Valencia’s comprehensive database, there were 147 banking crises between 1970 and 2011 alone, in an era of near-universal central bank dominance. Financial crises remain a persistent global phenomenon, occurring in cycles that coincide with episodes of credit expansion. Central banks have often prolonged boom periods with low rates and elevated asset purchases and created abrupt bust moments after making mistakes about inflation and credit risks.
According to Reinhart and Rogoff’s work, the rate of crises has not dramatically changed with central banking. Instead, the forms of crises evolved. Twin crises (banking and currency) remain common, and the severity, measured in output loss or fiscal costs, has often increased, especially as financial institutions and governments grew intertwined with monetary authorities.
The Great Financial Crisis of 2008, the Eurozone sovereign debt crisis, and the 2021–2022 inflationary burst rank among the events with the highest costs in history, contradicting the view that central banks have neutralised the risk or costliness of crises.
Central banks act as “lenders of last resort” and regulators. However, with each subsequent crisis, the solution is always the same: larger and more aggressive asset purchase programmes and negative real rates. This means that central banks have gradually moved from lenders of last resort to lenders of first resort, a role that has amplified vulnerabilities. Due to the globalisation of modern central banking and financial innovations, crises tend to be larger in scale and more complex, impacting most nations. The profound involvement of central banks in markets means their policies, such as emergency liquidity or asset purchases, mask systemic risks, leading to delayed but more dramatic failures.
In many advanced economies, recent waves of crises were triggered by debt accumulation and market distortions engineered by central banks, often under the guise of maintaining stability. The IMF and World Bank both note that about half of debt accumulation episodes in emerging markets since 1970 involved financial crises, and episodes associated with crises are marked by higher debt growth, weaker economic outcomes, and depleted reserves—regardless of central banking.
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