Using the US and UK as reference points, consider the numbers after the financial crisis 2007 – 2008. US: a loss of $8 trillion, borne by the stock market and a 10 per cent peak of unemployment in 2009. $9.8 trillion were lost by Americans because of plummeting house values and a decrease in the worth of retirement accounts. UK: The eventual cost of bailing out the banking industry stood at £137bn; £878 remained the amount in real terms that savers have earned from a hypothetical £1,000 placed in a savings account in 2007-08. Yes, they have lost money because of ultralow interest rates! Take a look around now and it seems that the financial crisis of 2007-08 is fast becoming a fading memory. Financial liquidity was indeed the order of the day for the COVID-19 pandemic but in doing so excessively, central banks – more than any other entity – have perhaps sown the seed of another asset collapse in the future. Consider. Without negating their importance, and when all the pomp and show is taken away, the actions performed by central banks can be simplified to these two. One, controlling borrowing rates. Two, managing the money supply in the economy. In response to the pandemic, central banks everywhere used these two levers aggressively – as they should have at the start because of the catastrophic nature of potential economic devastation. Interest rates were slashed close to zero and debt was bought to inject more money into circulation. The consequence of the two actions? Even cheaper debt! The IMF estimates that in 2020, central banks provided trillions in monetary support. One look at the balance sheet of major central banks confirms this notion. European Central Bank, €6.5 trillion. US Federal Reserve, $7 trillion. Bank of Japan, ¥650 trillion. Therefore, the interventionist nature of a loose monetary policy is clear to see and the underlying strategy even clearer: make debt cheapest to encourage investment and deter saving. The policy objective: easy cash forces companies to invest and hire to get the real economy moving based on job growth and consumer confidence. The problem: investors chase higher returns around the world and move towards the highest yield, i.e. away from safe assets. The result: overinflated asset bubbles pop, fiscal stability is conceded and all before the real economy can benefit from the cheap and abundant cash! Financial liquidity was the order of the day for the pandemic but in doing so excessively, central banks have perhaps sown the seed of another asset collapse. If that wasn’t enough, governments across the world joined in with an expansionary fiscal policy underpinned by massive spending and handouts. The IMF suggests that world governments have spent around $12 trillion in stimulus and grants! In the US, the Federal Housing Administration not only provides discretionary loans for first time home buyers but also gives homeownership vouchers. In the UK, the Ministry of Housing runs a scheme where the UK government guarantees and pays 20 per cent of the deposit on a new build house if the first time buyer can furnish five per cent of the deposit. Additionally, the local lenders are being asked to provide mortgage products with only a five per cent deposit or in some extreme cases, a 0 per cent deposit! I recall ironically that providing 100 per cent mortgages – prospective buyers needing to pay no deposit – was one of the reasons cited for the financial crisis 2007-08! The confluence of the two interventionist endeavours – a loose monetary policy and an expansionary fiscal policy – means that asset bubbles are already in the making. One glance over the property markets across the world proves that point! While it is true that the cost of not doing something was great, it may be true that overdoing it generates an equally opposite and extreme scenario which consequently leads to a bigger fall! I guess that central banks and governments have to walk that tight rope but for now “central banks know what they are doing – basically lowering the return of safe assets to increase demand for risky ones” as per Alicia García-Herrero, chief economist for Asia–Pacific at the French investment bank Natixis and who has previously worked for the IMF and the European Central Bank. All while the real economy and 90 per cent of the world consumers don’t get any benefit out of this at all! Jerome Jean Haegeli, the group chief economist at the Swiss Re Institute in Zurich, suggests that central banks are in a global liquidity trap. “The liquidity bazooka buys time and pushes up asset prices but has zero value in improving economic trend growth. Like a black hole, once you are in it, it is extremely difficult to get out. That’s where we are in central banking, we are in a liquidity black hole.” Policymakers will soon need to wake up and stave off a potential and catastrophic bust that can again ruin people, economies and countries! This is because while there is less risk to growth now, there is more risk to financial stability and asset bubbles. The party can come crashing down before we can say “in stimulus we trust”! The writer is Director Programmes for an international ICT organization based in the UK and writes on corporate strategy, socio-economic and geopolitical issues