Submitted by Taps Coogan on the 25th of November 201 to The Sounding Line.

CNBC’s Rick Santelli recently discussed the impact of central bank tightening, or what he calls the liquidity exit or ‘Lexit,’ on markets and why it is so important that central banks relinquish control of interest rates to the markets.

Santelli Exchange: Counterfactuals of the liquidity exit from CNBC.

Rick Santelli:

“In my opinion of lot of this continues to have to due with central banks… Maybe central banks should leave everything the way it is forever… But just look at the financial institutions in Europe. Look at the banks in Europe. Look at the insurance companies in Europe and Japan. Their performance, and indeed the economy’s performance, is capped. Productivity…, all central banks scratch their heads ‘we don’t know where it’s gone,’ but we know we can’t do better until it comes back. Isn’t the notion of global productivity loss associated with the fact that we’ve let all the walking zombies with low interest rates survive…? We can all complain. Yes we’d like the stock market to go up forever. But in the end, there is a responsibility to create a landscape… where we allow the markets to move interest rates. But in order to get their, we need to reverse some of the quicksand that the markets are standing upon, and that is what we are going through right now.”

While the past year has been hard on global markets, if the world is ever going to get back to the more reasonable monetary policy that is necessary to stimulate real economic growth, central banks must reverse the excessive monetary policy of the last decade. Many people (including yours truly) have been warning for years that a tightening process could cause markets to suffer, and they have. Yet, the current market dynamic is necessary and healthy. Rising interest rates, rising inflation, and the reduction in ridiculously elevated stock PE’s over the last year are beginning to bring financial markets closer to reflecting actual economic realities. While that process is painful for most investors, and may get more painful, it is critically important. The problem is not that financial assets are now struggling. The problem all along has been that real economic growth in most global markets has been very weak and that monetary policy disconnected financial asset prices from the real economy. It led to large and unsustainable distortions in wealth and capital flows and delayed the actual economic reform that has been badly needed all along. Unfortunately, central banks have delayed the tightening process for so long that financial markets have gotten so disconnected from reality that managing a normalization without provoking a crisis is going to be a very difficult balance act. Nonetheless, it is necessary.

Enjoy the video above.

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