Wolf of the City

Martin Wolf’s recent radio programme – “How Low can Rates Go?” – described and illustrated the dilemmas facing monetary policy-makers.

Nine years from the start of the great financial crisis, Wolf reported, economies had still not returned to “normal”.  Capitalism was perceived by many to be failing to deliver; globalisation a con trick.  The political situation in many countries was deteriorating.  Bill White commented that QE had had little traction on the real economy. After so many monetary experiments, negative rates looked like “the last refuge of the scoundrel” .

Mervyn King pointed out that in 2008 nobody expected low interest rates to last so long. “We have thrown an enormous stimulus at the economy, with mediocre results”, said White. Evidence of the harm done by unconventional policies – such as keeping zombie companies and banks alive – was accumulating.

Something deep going on…

“Something deep” was happening.  Was the huge overhang of debt the real problem?  Or the reluctance of politicians to drive through structural and other policies? Central banks were the only game in town. But what policies were needed to support central banks’ low rates and QE?  Or was something deep going on about money itself?

For many of the people Wolf interviewed, the diagnosis was clearly lack of demand. If that diagnosis was right, Adair Turner asserted, then there was an answer – governments/central banks could create demand and inject it directly into the bloodstream of the economy.  Others pointed out that the regime of low/zero or negative rates punished savers. Future pensions were at risk, as was banking profitability, so that bank lending was crippled.

Meanwhile, the lucky few at the top of the pyramid were benefitting from asset bubbles. Charles Goodhart pointed out that central banks could drive rates down much further into negative territory, but would need “political cover”: politicians would have to inform the public that such a policy would reduce the value of their savings. Would “ordinary people” get scared, Mervyn King asked?  “We have to do radical things”,  said Turner, climbing into the seat of his money helicopter. “Stop”, shouted Otmar Issing: “Once you let politicians get their hands on the money printing machine, you are lost”. 1923  all over again. “He is German” said Wolf ominously. Gutenberg and the printing press….

Others likened central bankers to the God Atlas, carrying the world on his shoulders.  Andy Haldane pondered whether the whole “meaning of money” was in question. Let’s talk about digital cash, that might cheer people up. Digital cash might be used to give users a return, a yield, on their money (as suggested, by the way, in The Money Trap); but equally, as others said, it could be used to deny money to depositors (“curb access to cash”).

…but what?

Was there too much risk-taking? No, said the central bankers; the  point of the UK’s QE programme was to raise the prices of risky assets. As after the Great Depression of the 1930s, risk takers were still bearing the scars of the crisis. We (policy makers) had to lift the animal spirits of risk-takers. But how? Politicians could easily abuse helicopter money (for a careful, balanced account of this debate, see Daniel Hinge’s article here -“Helicopters bearing gifts”).

Politicians would leave things to central bankers, concluded Wolf gloomily: we, the public, were the guinea pigs. The situation was unprecedented. It raised “deep questions”.  Yet it seemed likely to last. Dilemmas unresolved.