Monetary policy: transparency or obfuscation?
We
live in a era where monetary policy is more transparent than ever – if
measured by press conferences, publication of minutes and individual
policy-makers forecasts.
At the same time, the behaviour of central banks has never been less clear.
Any
discussion of the theoretical and practical details of global monetary
policy reveals very quickly that even most specialists in the area don’t
really understand what’s going on. If you are in any doubt, try asking
any macro-economist these two questions: ‘Is the ECB’s TLTRO programme
‘fiscal policy’?’ or ‘Is the Bank of Japan’s introduction of tiered
reserves ‘helicopter money’?’ Many will need to double-check what the TLTRO is, and take a refresher course on tiered reserves. Even then, most answers approximate jibberish (I’ll omit citations).
We
are now in a world where behind superficial transparency hides extreme
obfuscation. This is harmful and unnecessary. Global central banking,
like many areas of the body politic, is crying out for serious
leadership.
Let
me go straight to the punchline: central banks have the tools to solve
the shortfall in global demand, they are currently using these tools,
but doing so in a half-hearted, opaque and ineffective fashion, while
pretending that they are not.
If
you are in any doubt about this read three of best macroeconomists in
the world, who understand the detail, know about history, and can
explain almost any monetary acronym you throw at them: Brad DeLong,
Simon Wren-Lewis and Martin Sandbu. Wren-Lewis highlights the extent of
current confusion in this dissection of the Bank of England’s recent decision:
the Bank simultaneous jokes about the absurdity of doing helicopter
money and announces a variant of it (hidden behind the acronym, TFS). The FT’s Martin Sandbu makes a similar point with equivalent incisiveness. Brad DeLong on his go-to website on all matters economic (and many other matters, too) has written about and referenced all these issues.
Ok,
so how can central banks raise global demand? In the simplest terms:
they have to be wiling to make (accounting) losses. Now before you
switch off and say ‘forget it’, or, if you’re a pedant, ‘that’s fiscal
policy’, let’s be absolutely clear: they’ve already started, and worse
than that they are exposing themselves to losing a lot more than is
necessary in a completely ham-fisted and ineffective way. Economists
need to focus on this, and escape the pedantry and theoretical blind
alleys we have become obsessed with.
Lose money effectively
A little-commented on fact is that up until recently, QE has been hugely profitable
(in simple accounting terms) for central banks. The reason is
straightforward: they buy bonds yielding more than they pay on the
reserves they create to buy the bonds. Now if CBs are able to make huge
profits in pursuit of monetary goals, they can make large losses. In
fact due to the colossal bond buying programmes of the BoE, BoJ, Fed and
ECB, if bond yields go anywhere close to levels of, say, 3% or 4% these
central banks will suffer huge accounting losses. In fact, this is what
they want – bond yields rising would signal a strong recovery in global
demand. Making a perpetual loan to households equivalent to 1% of your
balance sheet runs less risk of loss than buying 20-year JGBs or Bunds
equivalent to 10% of your balance sheet, when you expect to lose 10%
(and could lose a lot more). Furthermore the BoJ has already
overridden any squeamishness about creating or buying assets at yields
below the interest rate on reserves it is paying. It has purchased JGBs
at negative yields, while remunerating most of the reserves created at
zero interest rates.
So
let’s be honest, central banks are either willing to lose money, in the
sense of creating negative net interest income, or in exposing
themselves to significant expected capital losses. If there’s a taboo,
it was breached a long time ago. Also, let’s be clear, it’s a silly
taboo – central banks ‘losing money’ to meet inflation targets is
precisely what they are supposed to do. It’s accounting nonsense, based
on treating the monetary authorities like private banks. They’re not:
the benefits of creating money to raise demand show up as an externality
– nothing less than higher living standards! Another way to make the
same point is to recognise that bank reserves are not liabilities in any meaningful sense. Moreover, the technicalities of dealing with more reserves than we need – the only thing that matters on a CBs balance sheet – can be easily dealt with.
So
the problem is not about central banks losing money, it is the complete
lack of transparency: a huge exposure to losses is being created, and
transfers through money printing is occurring by stealth – all without
materially increasing demand. Surely we can do better.
It
is in fact very clear what needs to be done. We need to crystallise the
‘losses’ up front (or make perpetual loans so the accounting is
appropriately redundant): central banks need to make transfers direct to
the household sector. We should do this transparently, and fairly. Many
of us, from across the political and theoretical spectrum, have outlined how: Brad DeLong, Simon Wren-Lewis & Mark Blyth, Adair Turner, Lord Skidelsky, Matthew Klein, Steve Keen, Frances Coppola, Martin Wolf, and many others. The empirical evidence that these policies work
– and require the printing of far less money – is more compelling than
for any current policy ‘innovations’ such as extending QE to the
corporate bond market or negative interest rates.
Now,
some members of the economics profession are up in arms: ‘this is
fiscal policy!’, ‘central banks have too much power’!, ‘Zimbabwe!’, ‘everyone will panic!’.
Well, we already are doing this – it’s just completely obscured,
largely ineffective, and with random (or highly skewed) distributional
consequences. And no one is panicking. No one is making a serious case
that it’s illegal. The ECB strayed way beyond its constitutional legal
mandate in Greece and Ireland, but transfers to households are entirely legal,
and subject to its independence and the absence of fiscal intervention,
arguably a legal obligation. So these arguments are already redundant. A
point Karl Whelan professor of economics at UCD, and former Fed
economist, makes very lucidly. Central banks are already either making losses, or running the risk of huge accounting losses. That in-of-itself is fine – the only argument is one of efficiency.
The
problem is very clearly not the law, potential panic, or hyperinflation
– it is a preference for opacity over effectiveness. Argument alone may
not win this one, it requires something else: leadership.
Addendum
This interview from Peter Praet, executive board of the ECB is the exception that proves the rule – an honest appraisal of what all central banks can do if they want to.
This remark
from the Bank of England’s Ben Broadbent epitomises the problem. If the
Bank of England succeeds in raising demand, which presumably it expects
to do, it will make huge accounting losses on its QE programme.
Nessun commento:
Posta un commento