There are two question that are prompted by this
loose banker talk, firstly what monetary policies might they have up their
sleeves to save the world from high unemployment and
secondly, should they have these wider concerns anyway.
Central Bankers have limited options for reflating an economy and all of these techniques have been tested over the last 5 years in different markets. Britain has led the way in balancing mild austerity with a reflationary monetary policy, which has included large doses of (plain vanilla) quantitative easing. They have supplemented this QE with negative real interest rates, and a more direct “funding for lending” scheme that attempts to force that banks to lend more to business.
Bernanke gave us a detailed assessment of the costs
and benefits of unconventional policy easing by the Fed. He believes that bond
purchases by the central bank had reduced long term interest rates by 0.8-1.2%
points, which has increased output by about 3 per cent, and employment by about
2 million jobs. These are significant benefits and well worth the costs, which
were fairly minor. There is no doubt that the initial exercise to
pump liquidity into the banking system was absolutely critical and saved us
from a 1930 style banking crisis, where banks rushed to improve liquidity by
for-closing on distressed debt.
Central Bankers have limited options for reflating an economy and all of these techniques have been tested over the last 5 years in different markets. Britain has led the way in balancing mild austerity with a reflationary monetary policy, which has included large doses of (plain vanilla) quantitative easing. They have supplemented this QE with negative real interest rates, and a more direct “funding for lending” scheme that attempts to force that banks to lend more to business.
Bernanke takes control |
Similar to a sick patient who requires a blood
transfusion to solve an immunity problem, the first doses is always the most
important, subsequent transfusions make an incrementally smaller and small
difference. These subsequent injections of new blood may have some
psychological effect but they probably don’t have much physiological
impact. In the case of QE further doses will remind investors and
borrowers that there is a medium term intention to keep rates low but that’s
about it.
This issue of communication and managing people's
medium term expectations on the costs of money (whatever the inflationary
outlook) seems to have got the whole economics fraternity’s
attention. Bankers are now thinking that by aggressively managing
creditor expectations they can govern growth rates, employment rates and
probably the timing of the “second coming”!
The problem here is common among bankers, once you give them
some credibility they want to take over the whole
world; misunderstanding that the real economy depends on markets for
goods and services and these are the markets that provide jobs and sustain
lasting growth. What many of these markets need is structural reform
and more competition, and QE is likely to work in the opposite direction,
propping up failing business, reducing the need to raise productivity and
generally penalising depositors whilst rewarding creditors. As
central bankers around the world search for better ways of communicating their
intention to keep real interest rates at a negative or very low value what the
real world economy need is an assurance that the value of money will be
restored.
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