The new generation of top central bankers – notably Mark Carney, Janet Yellen (prospectively), Haruhiko Kuroda, and Mario Draghi – need to lift their sights.
Official policies to combat continued economic weakness rely on:
- Central banks using their balance sheets even more aggressively – and riskily – to provide monetary stimulus
- applying new layers of regulation over capital and liquidity
- giving new “macro-prudential” powers over the privagte sector to central banks/regulators
- so-called structural reforms
- Faith that time and patience will enable leverage to be reduced sufficiently.
The approach has become tiring – and the people who advocate it tiresome. They can think of nothing else than more of the same medicine as we had given to us in previous cycles. It depends on regulators, central bankers and governments using their discretion to steer their economies safely away from booms and busts when all experience suggests they cannot do that. An attempt to raise interest rates, for example, in 2004-2007 would have been resisted. Why should next time be any different?
If central banks contimnue to underwrite deficit spending, support weak banks and inflict the resulting monetary distortions on the people who actually contribute real value to the economy this will result in the steady demoralization of capitalism.
A. The problem restated
The underlying fallacy is the belief that if each country does the right thing in its own interests for its own economy, then the global economic and financial system can take care of itself. This delusion was a major cause of the financial and economic collapse.
The new generation of central bankers need to focus attention on the two-way links between their policies and the international monetary system. The BIS should orchestrate talks aimed at promoting international public goods of financial and monetary stability. The ECB, Fed, Bank of Japan and Bank of England must tear themseves away from their obsessive focus on yet more monetary easing and lift their sights to the effects on the world. It is not a pretty sight.
In the grip of the money trap, the global economy is suffering from:
- Excessive swings in nominal and real exchange rates
- Competitive currency depreciation
- Financial market “balkanization” – trend towards the re-nationalisation of finance
- Financial repression – controls, interest rate manipulation, direction of credit, special schemes to channel credit to “worthy” sectors, zombie companies kept afloat on low rates
- US policies undermining key pillars of the system, such as the integrity of the US Treasury bond market
- Pressure for changes in the international monetary system from China and other EMs
- Low confidence in fiat money management
- Purchases of gold by central banks at a 40-year high
- Excessive regulation of financial institutions
- Continued banking fragility, notably in Europe, intermittent and selective access to interbank market, dependence on central bank support
- Grossly swollen central bank balance sheets with unconvincing exit strategies
- Loss of moral authority of monetary guardians (central banks, regulators, governments); for example, QE has caused what are perceived to be arbitrary and unfair distributional effects, penalising some sections of society and rewarding others.
- A sharp decline in cross border flows of long-term capital, especially equity capital. As the G30 has pointed out, these are urgently needed to help finance massive long-term infrastructure needs.
B. Principles to guide reform
The underlying challenge should be conceptualised as one of dealing with and successfully managing the pace of globalisation, notably in financial markets, investment flows and the real economy, and the implications for national policies.
- Reform should aim at providing the global public goods of monetary and exchange rate stability.
- Without such rules and obligations, there are too many easy arguments for currency manipulation – which is always in the interests of local politicians.
- Rules are needed to keep policy focussed on the medium to long term. If national policies could be focussed on such a longer-term horizon under current global financial system, then they might work. But that is not politically possible. They are hostage to political imperatives.
- Policy-makers need rules to allow them to pursue adjustment policies that are in the general interest and thus, in the end, in the interests of their own economies.
- Fixed exchange rates give signals of the need to make domestic policies consistent with the international interest in ensuring adjustment.
Key elements
The objective is to bring the international, collective interest to bear on the domestic policies of each country – and especially major countries or regions. It would constrain them to follow policies that were in their own long-term interests.
- The temptation facing governments to follow short-term interests for electoral reasons can be countered in a systematic way by obligations to abide by a rule book that all had signed up to.
- A currency is more useful the wider the area in which it is accepted .
- The optimal currency area is the whole world.
- Countries could choose to leave the system as a safety valve and rejoin at an exchange rate of their choosing.
- Incentives for good behaviour and penalties for poor behaviour should be left so far as possible to the markets.
- The reformed system should not require a world government.
A future article will discuss solutions.
The real international money trap
The new generation of top central bankers – notably Mark Carney, Janet Yellen (prospectively), Haruhiko Kuroda, and Mario Draghi – need to lift their sights.
Official policies to combat continued economic weakness rely on:
The approach has become tiring – and the people who advocate it tiresome. They can think of nothing else than more of the same medicine as we had given to us in previous cycles. It depends on regulators, central bankers and governments using their discretion to steer their economies safely away from booms and busts when all experience suggests they cannot do that. An attempt to raise interest rates, for example, in 2004-2007 would have been resisted. Why should next time be any different?
If central banks contimnue to underwrite deficit spending, support weak banks and inflict the resulting monetary distortions on the people who actually contribute real value to the economy this will result in the steady demoralization of capitalism.
A. The problem restated
The underlying fallacy is the belief that if each country does the right thing in its own interests for its own economy, then the global economic and financial system can take care of itself. This delusion was a major cause of the financial and economic collapse.
The new generation of central bankers need to focus attention on the two-way links between their policies and the international monetary system. The BIS should orchestrate talks aimed at promoting international public goods of financial and monetary stability. The ECB, Fed, Bank of Japan and Bank of England must tear themseves away from their obsessive focus on yet more monetary easing and lift their sights to the effects on the world. It is not a pretty sight.
In the grip of the money trap, the global economy is suffering from:
B. Principles to guide reform
The underlying challenge should be conceptualised as one of dealing with and successfully managing the pace of globalisation, notably in financial markets, investment flows and the real economy, and the implications for national policies.
Key elements
The objective is to bring the international, collective interest to bear on the domestic policies of each country – and especially major countries or regions. It would constrain them to follow policies that were in their own long-term interests.
A future article will discuss solutions.
Written on March 7, 2013 at 9:48 am, by robert
Categories: Homepage, News and Comment, Official Money, RP's Diary