Less central banks, more private sector

Professor Moorad Choudhry
Former World Bank President Robert Zoellick
Andrew Harrer | Bloomberg via Getty Images

Regular readers of this column – which should surely rank in double digits by now! – will know that a persistent theme has been that of the long-term dangers inherent in current central bank monetary policy. Keep interest rates at zero for long enough and print trillions of dollars of cash at the click of a mouse button and it doesn't take a genius to conclude that such action is not a solid foundation for sustained economic recovery.

For once someone with a bit of profile has reflected on the risks of Western central bank thinking. A few weeks ago the former head of the World Bank, Robert Zoellick, suggested that central banks were "digging a big hole" for themselves if they maintained monetary stimulus for much longer. His view was that economies would become "dangerously dependent" on stimulus policies, and central banks needed to do more to encourage the private sector to start driving growth.

(Read more: Fed tapering a big issue for the world: Zoellick)

What a relief at least someone is speaking sense. When there is a danger of deflation and depression one cuts interest rates and, at a pinch, engages in a spot of quantitative easing (QE). But that situation arose in early 2009. Five years later one is no longer staving off depression, rather one is artificially driving up private sector prices with a public sector underwritten guarantee. To quote Mr Zoellick:

"If you get too dependent on stimulus policies, you lose sight that the private sector should be leading growth."

(Read more: Fed taper already baked into market, Bogle says)

Spot on 100 percent. U.K. readers may have caught sight of finance minister George Osborne's Autumn Statement last week. He seemed to be positively basking in the warm glow of much-improved U.K. gross domestic product (GDP) figures, and a general feeling that the economic tide has turned. If that is the case, then Mr Osborne's party may have a good chance of forming the next government in 2015 (when elections are due).

However an economy growing on the back of a personal consumer credit boom and mini housing boom is not one with a lot of long-term prospects. That's what we have in the U.K. now. That's pretty much what we had before.

There is nothing wrong in seeing positives in any form of economic growth. And Mr Osborne even announced a freezing of payroll taxes for companies who hired staff under the age of 21 (it should have been under 25, but hey it's better than nothing. We've only been calling for it for since 2010…)

(Read more: A UK tax to send'shivers down the spine')

But if we are in growth mode now, can someone please explain to me why the U.K. government is now subsidising house purchases? What possible rationale, beyond the obvious political one, can there be for that? Allied to zero rates and QE from the Bank of England and it isn't a good combination.

As Mr Zoellick noted, sustainable growth isn't going to come via a public sector underwriting arrangement. That's what has been driving the FTSE 100, the S&P 500 and any other index you care to name, to successive market highs throughout this year. And now we have a mini-housing boom building in the South-East of England.

Central banking is no longer the discipline of taking away the punch bowl just as the party gets going. It appears to have become the art of waiting until the bowl has been topped up several times before asking ourselves, "Are We Drunk Yet?"

Over five years after the crash, Western economies are still in crash monetary policy mode. It brings a whole new meaning to "short termism". The longer we keep stimulus going, the harder and more painful it will be to even start unwinding.

As The Smiths sang once, "Stop Me If You Think You've Heard This One Before…"

Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons 2012).