Central bankers know they may be laying the ground for it. An alternative approach is needed.
In effect, this is the money trap in operation – again.
Central banks are in a quandary. Unless they return to “normal” levels of interest rates quite soon, the current model of capitalism, which depends on market-determined long-term rates, cannot function. If they do, however, raise interest rates any time soon, with debt leverage still high, they will increase the chances of a renewed slowdown or even recession – just when governments are celebrating recovery (and many of them preparing to face their electorates). Such a slowdown and associated rise in bad debts would put renewed strain on still-fragile banking systems again.
The ECB is perhaps in the worst position – yet the other big three central banks are also stuck. It is true that much of the blame must be pinned on governments, which have not performed their side of the bargain. They have gone slow on structural reforms, on rebalancing their economies, on cleaning up public finances, and raising retirement ages and have done little to clear up the debt overhang that is still holding back recovery.
Yet central banks’ current policies are no longer viable for four big reasons:
First, easy money has lost its grip. It is not stimulating the real economy. Indeed, monetary policy uncertainty may well be contributing to economic sluggishness. It may, for example, be holding back new investment.
Here’s why. Businesses are not inclined to invest in new capacity when they fear a crash in stock markets, when they cannot judge the true (market) level of long-term rates or calculate risk-adjusted returns; far safer to speculate on new financial products or real estate or use money to buy back your company’s shares.
Artificially low rates also corrupt the functioning of the equity market, increasing the bias towards debt financing.
Second, the trend to centralise control over credit and money in the hands of central banks is incompatible with allocation of resources mainly through markets.
The Bank of England requests the government to give it more discretionary powers over regulatory tools such as time-varying capital and leverage ratios, and seems to have no qualms about equipping itself to intervene ever more deeply in the functioning of the system. Janet Yellen said in her recent testimony that she thinks that some types of stocks are overvalued. So have central bankers become stock-tipsters?
In fact, a bias towards ever greater interference by public officials is built into the current fashion for macro-prudential controls – all too easily exploited as a wonderful new option for promising politicians they can have low interest rates, a captive market for government debt and safe banks.
Third, their current policy stance leaves central bankers with no ammunition to fight the next recession. If interest rates were at more normal levels, then they could be cut if needed. Stuck close to zero, they could only indulge in yet further rounds of QE.
Fourth, current policies are leading to currency wars. The governments and monetary authorities of the major currency areas would like to depreciate their currencies. We are on a slippery slope towards competitive devaluations and economic and financial protectionism.
There is no easy way out of this quandary, which shows many of the same signs as I analysed inThe Money Trap. The basic pattern of policy and the response of prices and output has not changed. Which is why the chances for another leg of the crisis rise by the day.
Thus central banks issue reassurances to markets and governments without believing them.
Current official nostrums and policies do not measure up to the scale of the challenges.
In recent posts (shown below) I have tried to peer below the surface to look at the changng role money places in people’s opportunities and life-chances and whether it can be changed from something that feels to many people as an oppressive, alien force to a one that is potentially creative and unifying. Must money be an impersonal, scary force over which “we” have no control?
In practical terms, how can the world’s money markets be organised in the general interest?