The FT has an interview with Mark Carney, who is now in his valedictory period at the Bank of England before leaving in two months. As they note:
The global economy is heading towards a “liquidity trap” that would undermine central banks' efforts to avoid a future recession, according to Mark Carney, governor of the Bank of England.
In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.
A liquidity trap occurs on the rare occasions when monetary policy loses all effectiveness to manage economic swings and looser policy does not encourage any additional spending.
“It's generally true that there's much less ammunition for all the major central banks than they previously had and I'm of the opinion that this situation will persist for some time,” he said.
So, three thoughts.
First, central banking really is dead in the water: the idea that an organisation with almost no weapons left in its armoury can really do anything to assist the delivery of economy policy is absurd.
Second, in that case fiscal policy is the only game in town. This has to be said time and again whilst noting, as Carney does, that central banks cannot run fiscal policy.
Third, as Carney also notes, that means that they cannot run green policy either: Financial markets can assist green policy but they are no substitute for the real thing.
So, in that case what's the remaining point of emphasising the key role of central bankers, as Labour's fiscal rule still does (despite all my best efforts to undermine it)? There is none at all, as I have argued ever since John McDonnell signed up for this irrelevance. I sincerely hope that this idea may now be consigned to the bin, where it belongs.
The job of the modern central banker is to keep interest rates as low as possible. That's it. And they must do so working with a Treasury. They are the subordinate in the relationship. And they are simply a technocrat. Their glory days are over.
We need to move back to the era when democratically elected politicians manage the economy.
It's long overdue.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Yes, monetary policy is now ineffective due to the liquidity trap and zero lower bound, which also means that neo-liberalism is over because it relies heavily on the idea of using monetary rather than fiscal policy.
As for Labour’s “Fiscal Credibility Rule” it states that:
“When the Monetary Policy Committee decides that monetary policy cannot operate (the “zero-lower bound”), the Rule as a whole is suspended so that fiscal policy can support the economy. Only the MPC can make this decision.”
This rule doesn’t “emphasise the key role of central bankers”. The rule, having been conceived in an era when when interest rates are below 1% and have been for 10 years (that is to say when rates are so so close to the zero lower bound that lowering rates can do very little) – is a rule that suspends itself.
It is effectively a rule that, under current circumstances, calls for active fiscal policy. Although it is a weird way of going about it, especially so given that it requires the central bank to declare itself ineffective (?). Your generally right though, the rule is not only weird but weirdly obsolete.
Regarding this: “The job of the modern central banker is to keep interest rates as low as possible. That’s it.”
Is it? How are you going to stop low interest rates from generating asset-price bubbles as they have done for the past 30-odd years?
https://labour.org.uk/wp-content/uploads/2017/10/Fiscal-Credibility-Rule.pdf
Read it carefully – central bankers are in the driving seat
Removing tax relief from the assets that inflate to create bubbles….
Ah! Now we are talking and I generally agree with that suggestion. It would make a massive, critical difference but I’m not sure that it would quite be enough. Some macro-prudentials and financial regulation might also be in order (one famously discussed example being the re-introduction of Glass-Steagall in the US).
Regulation can result on moderately higher interest rates because (long-story-short) the spreads change. I’m not so sure that that’s entirely a bad thing, all things considered.
Perhaps the key thing here is that interest rate changes aren’t primarily used for macro-economic adjustments and return to the role of providing affordable credit?
You would want higher rates?
Why?
The financial crash that would bring would make Rebecca Long-Bailey shore up the establishment