Are central banks' monetary policies a source of systemic risk?

Earlier this week, the Bank of England's Andrew Haldane said that economists share in the blame for the financial crisis and the ongoing recession.

Mr. Haldane is the executive director of financial stability at the BoE and a member of the BoE's Financial Policy Committee.  The FPC is suppose to focus on sources of financial instability and systemic risk.

As a result, my question is:  based on Mr. Haldane's comments are central banks' monetary policies a source of financial instability and systemic risk?

Regular readers know that your humble blogger's answer is yes.

As this blog has documented on numerous occasions, the economic headwinds created by zero interest rate policies and quantitative easing appear to far outweigh the benefits.  Not only that, but the policies have never be shown to promote economic growth (Japan is in its third lost decade when it comes to economic growth).

So why do central bankers pursue these policies that crush the real economy with what appears to be messianic zeal?

Mr. Haldane provided the answer in his observation that economists have come to believe in the assumptions underlying economics as if they were a "theological doctrine".  As a result, economists are on a crusade to prove they are right.

As this blog has documented, many of the assumptions that economists make are wrong.

For example, they assume that zero interest rates will force investors to reach for yield.  This is not true.  Investors see that pricing in the financial markets is distorted by the central bank policies.  As a result investors are now focused on return of their capital over return on their capital.  This deprives the real economy of capital it needs for growth.

This raises another interesting question:  given economists' religious belief in the assumptions underlying their models of the economy, are they fit to be central bankers?

The Telegraph's Jeremy Warner offered

Wanted: applicants for the post of Britain’s most powerful technocrat. 

Required qualifications include unmatched knowledge of macro and micro economics, in-depth experience of banking and the complexities of modern finance, natural authority, exceptional communication and media skills, outstanding administrative abilities, proven leadership qualities and a deity-like ability to transcend the political divide. 

It is small wonder that George Osborne is struggling to find a suitable candidate for the post of governor of the Bank of England, which falls vacant when Sir Mervyn King retires next June. 

By consolidating responsibility for banking supervision and financial stability under the same roof as the Bank of England’s existing monetary functions, the Chancellor has created a huge job and an almost impossible ask....

Imagine how much easier it would be to find qualified individuals if the requirement for 'unmatched knowledge of macro and micro economics' is dropped.

Whoever the Chancellor chooses will have to answer some profound questions about the future of central banking and the economy. 

Money is only a means of trade and exchange, yet over the last decade or two, it has been catastrophically mismanaged at almost every level. As custodians of the monetary system, central bankers have been a large part of this mischief. 

Nor, having messed up so spectacularly in the years before the crisis, is it clear they’ve got their response to it entirely correct either.

Which is exactly what Mr. Haldane observed.  More importantly, his observation in their belief in their assumptions suggests that economists are singularly incapable of correcting the response of monetary authority.  Doing so would require that they stop believing.  Hence the question:  are economists fit for central banking?