Central banks' loose money policies have created a mirage of financial stability that's become difficult to escape, warns Jeremy Warner, assistant editor at The Daily Telegraph.

Central banks are attempting to revive the economy and end the downturn that was caused by too much money by issuing more money, hoping a sustainable recovery will gain traction at some point, Warner says.

"Unfortunately, the near free money environment has gone on for much longer than anyone anticipated, and we seem incapable of easing ourselves off the life support."

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Side effects from the long-running Federal Reserve stimulus include capital misallocation, asset bubbles, risky lending and artificially low default rates. Default rates on the euro zone have dropped during the recession in the last two years, the opposite of what you'd expect, Warner says, arguing that defaults are needed for the economy to "reboot" and recover.

Risky lending, similar to lending in the run-up to the financial crisis, has returned full force, he argues. Leveraged loans now account for a larger percentage of new loans than they did before the crisis.

"Corporate credit spreads have sunk to record lows, debt funding for private equity takeovers is once more on a strongly rising trend, and mortgage real estate investment trusts, which fund long-term mortgage assets with short-term money, have come surging back."

New issuance of "payment in kind notes," which allows the borrow to repay the loan by borrowing more, increased by a third in the first three quarters of the year.

Piling into corporate bonds, investors are finding looser terms and riskier bets. The boom in corporate bonds in Europe takes away key borrowers from banks, removing an important funding source and making them more dependent on the European Central Bank (ECB). In response, the ECB plans asset quality reviews to show which banks are solvent.

Its previous banking stress tests were "comically deficient," Warner charges."The ECB needs to do a proper job this time if confidence is to be restored, but in so doing it will very probably exhaust the capacity of some governments to pay off the bad debts."

Responding to criticisms of the Fed's stimulus at a National Economists' Club meeting last month, Federal Reserve Chairman Ben Bernanke said lower interest rates have helped stimulate the economy and lower unemployment, according to U.S. News & World Report.

He rejected charges that it is only helping Wall Street.

"While it would be better to have an even broader-based effort in Washington, the Fed is making an important contribution to middle class and lower-income folks' welfare."

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