Eichengreen says central banks should worry more about deflation than 'profits and losses'

Central banks should worry less about profits and losses and more about deflation and economic growth, argues economics professor Barry Eichengreen in a video interview.

"There's no limit to the ability of central banks to expand their balance sheet[s]", Eichengreen, a professor at University of California at Berkeley and a prolific author, told Central Banking in London this week, but added there appeared to be a "reluctance to actually go there".

"What you need are monetary policies of shock and awe," said Eichengreen. "We should be worrying about deflation and economic growth, not central bank profit and losses".

But he also said central banks were not omnipotent and underscored the importance of monetary and fiscal authorities "pulling in the same direction".

Eichengreen is currently on a tour to promote his latest book, Hall of Mirrors, which compares the great depression of the 1930s and the recession that followed the 2008 financial crisis.

The book has received attention for arguing that the Federal Reserve missed important lessons from the inter-war period and bungled parts of its response to the financial crisis as a result.

According to Eichengreen, the Fed "did too little to support economic recovery" following the collapse of Lehman Brothers in 2008.

"The result was that the US economy recovered at only about half the pace typical of the aftermath of a recession," he says. "We are still paying the price in the sense that GDP output is 10% below of where it would have been".

Discussing the US economy, which is growing at the fastest pace since 1999, and President Barack Obama's assertion this week that the country has "turn[ed] the page" following a half-decade of sluggish growth, Eichengreen expressed "worry about statements like ‘the financial crisis is over'".

"When a small central bank like the Swiss National Bank (SNB)… can surprise the markets and cause a couple of shadow banks in the foreign exchange space to go belly up, imagine what would happen if a big central bank wrong-footed the market," he warns.

But he also expressed confidence central banks would still be able to guide "sceptical" markets in the wake of the SNB's sudden decision to scrap its ceiling on the value of the Swiss franc last week.

"If other central banks stay on message," Eichengreen says, "they can credibly pursue forward guidance in the way they have attempted to do".

"I think [the Fed] will be more intent on maintaining that consistency and communicating clearly with the markets as a result of the SNB event, which only reinforce the point that you have to be consistent and you have to communicate clearly," he added.