Don't start the avalanche

Central bankers live in silent fear

It's scary to think what higher policy interest rates might do to a financial system habituated to virtually free money. Central bankers, though, profess not to be too worried about this risk. They are either overconfident - or living in silent fear.

Meltdown risk doesn't seem to be on the radar of the US Federal Reserve, the European Central Bank or the Bank of England. When the Fed's Janet Yellen and her global peers explain why they are not planning on increasing rates, they talk about inflation, unemployment and output gaps. Just as they almost never discussed the toxic buildup of credit before the 2008 crisis, they are silent about the current risks in the financial system. They never say anything like, "After five years of zero rates, with systemic leverage almost as high as just before Lehman Brothers failed and our economies still deeply scarred from the subsequent deep recession, we'd be taking an unnecessarily big chance if we raised rates any time before inflation was a clear and present danger."

If the monetary authorities are mulling the possibility of collapse - say, some big fund loses a massive bet on the yield curve, topples over and starts a hard-to-stop cascade of losses, fear and flights to safety - they're not doing it for the record. Even in the UK, where the housing market is dangerously hot and interest rates on most mortgages are tied to the central bank's base rate, the Bank of England's Mark Carney professes indifference.

Bank stress tests and new macroprudential tools provide some comfort. But banks are only one part of a complex and interconnected financial system. And, the world's governments, the rescuers of last resort, are less credible and creditworthy than they were last time around.

It may be that central bankers truly believe there is nothing to worry about. That would make them reckless. More likely, they are concerned but discreet. After all, publicly sharing their fear is all too likely to precipitate the very market panic they most want to avoid.