It appears that in extraordinary times we find the unthinkable normal. While our newspapers are full of news about COVID-19, a fascinating spectacle is unfolding on the financial markets. During the previous crisis central bankers were the heroes, but this time they could well end up getting (part of) the blame for a new financial catastrophe.

I quite understand that over a decade ago central bankers felt that they had no choice. ‘Whatever it takes’, as former ECB president Mario Draghi said in 2012, when governments failed to take action to combat the Euro crisis. And in March 2020, when the monetary retreat had barely begun, the brakes came off completely: zero nominal interest rates, negative interest rates and even more unconventional policy measures. Everything that fell at the start of the COVID crisis landed in the safety nets provided by the central banks.

You could say that this is another success story. But that would be true mainly for the financial markets. When interest rates are low, liquidity is in ample supply and economic activity is unlikely to rise sharply, all that money mainly ends up in assets: share prices, house prices, bitcoins, commodities. Everyone who has assets is a winner and debt costs nothing.

But when I hear people saying that while interest rates are so low, it is no problem if government debt goes up a bit further or that in this low-interest rate environment valuations should be considered differently, I become a bit suspicious.

Because these arguments are only tenable while current monetary policies remain in place. And low interest rates also reflect the economic outlook: low growth. But growth is actually what you need to pay back debt.

So, I can only draw one conclusion: central bankers have managed to let themselves be painted into a very awkward corner. We know that central banks really have no options left but to blast all risks away by throwing liquidity at them. That is what the markets are counting on, after all. This is what economists call the moral hazard: knowing that central banks will come to their rescue, financial market participants now have every incentive to take on more risks. This is how large bubbles come about, what brings along inequality and eventually threatens the stability of the system.

No one wants to talk about this moral hazard in the markets now, because no one has any clue what the road back will look like. The scenario of choice is one of higher growth, but the chances of that happening are not great. A COVID debt-overhang, low capital expenditure, structurally lower productivity gains and demographic headwinds are an anti-growth cocktail. Other options: raise interest rates regardless and acknowledge that all that debt will never be repaid. The previous Roaring Twenties began with great optimism and ended in a bloodbath. Just suppose. Who would get the blame this time?

This is a translation of Hans Stegeman's column in Het Financieel Dagblad, published February 9^th, 2021.