Business World

Monday 16 September 2019

David Chance: 'Central banks must let go of outdated policies'

A signpost greets travellers at the Gros Ventre entrance to Grand Teton National Park, in Jackson Hole, Wyoming, U.S. Photo: REUTERS/Ann Saphir/File Photo
A signpost greets travellers at the Gros Ventre entrance to Grand Teton National Park, in Jackson Hole, Wyoming, U.S. Photo: REUTERS/Ann Saphir/File Photo

David Chance

The world's central bankers come together in the mountains of Wyoming this weekend. They are nothing if not determined and the result is that they fail to learn elementary lessons just as much as the rest of us. From the Gold Standard to inflation targeting, their history is littered with adherence to economic orthodoxies that have outlasted their usefulness in the real world.

Worse still, central banks, from the Federal Reserve to the European Central Bank and Bank of Japan, insist they are right, and will keep on doing so at their meeting in Jackson Hole, Wyoming.

When ECB chief economist Philip Lane and one of the bank's rate-setters, Olli Rehn, rub shoulders with Federal Reserve chair Jay Powell at the event, they will all affirm their faith in achieving their 2pc inflation targets over the long term.

Whose long term that may be is open to question, and neither the Fed nor the ECB has hit it in a sustained manner in the decade since the financial crisis. Consensus among many economists is that 2pc is never coming back thanks to demographic changes and a savings glut.

For the Bank of Finland governor, once dubbed the 'Rehn of terror' for his love of post-crisis austerity programmes, the ECB playbook is the same one that has failed to lift interest rates in the eurozone off the floor thanks to anaemic growth in the bloc.

Rehn pledged this week "to make inflation converge towards its aim in a sustained manner", and said it would use "forward guidance", as well as cutting interest rates and chucking vast sums of money at bond markets once more.

Powell's Fed is transitioning from "restrictive" policy rates to "accommodative" by the end of 2021. But, to put it bluntly, the economic ship will keep on listing even if the world's central banks keep pushing on the same policy string.

"There is not enough monetary policy space to deal with the next downturn," three of the world's top former finance officials warned in a paper this week.

You can question the solutions offered up by Stanley Fischer, the former head of the Bank of Israel and deputy at the Fed, Philipp Hildebrand, the ex-head of the Swiss National Bank, and Jean Boivin, who worked at the Bank of Canada, but they do understand central bank policy.

So forget about inflation targets; bin studies of the on-off relationship between unemployment and inflation, as well as interviews aimed at jawboning markets through Bloomberg or Reuters. What is needed now is coordination between monetary authorities and the budgetary ones.

For Fischer, Hildebrand and Boivin, in their paper for the BlackRock Investment Institute, the answer is to "go direct", i.e. to put cash into the hands of the public.

There are other variants of this policy and it is time to give one or more of them an airing, or all of the sacrifices made in Ireland's austerity reign of terror will soon be haunting us again.

Amid the policy and hikes in Wyoming, central bankers could do worse than recall William McChesney Martin, the longest serving Fed chair, who in 1955 warned against the "roseate belief that monetary policy, backed by flexible tax and debt management policies" had relegated economic fluctuations "to ancient history".

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