The World Needs Central Bank Action in Concert

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Federal Reserve chairman Ben Bernanke talks about tapering the asset buying program and stock markets sell off. Incoming Bank of England governor Mark Carney hints somehow that low rates and quantitative easing will stay in place for as long as necessary, a point also emphasized by the European Central Bank, and stock markets pick up.

In the 21st century the global economy is closely interconnected. It makes no sense for a central bank to try to undo, in terms of monetary policy easing, what another central bank is doing. (Although to be fair no-one is "doing" anything at the moment, just hinting about when they might start talking about doing it. Or not doing it. It's complicated). But let's come to that in a second.

What does the last three weeks' market price action imply? That the capital markets only go up if taxpayers money is thrown at it. This is undesirable because it is self-defeating, the house of cards we spoke of recently. Investors seem to think equities are only worth buying if the central bank underwrites their investment. This is Alice in Wonderland stuff. The central plank of the capitalist system is of private money being used to invest in privately-owned companies, which operate to the benefit of their shareholders.

If five years after a recession investors think these private companies are worthy of their cash only if the central bank supports them, then perhaps we should re-model capitalism? Is this some new social democratic model? With the government owning the "commanding heights" of the economy via the central banks? There's a Nobel Prize in it for someone who can articulate it using econometrics.

In the meantime, we have one central bank thinking there is a point in time – perhaps two years away – at which it is wise to begin to start introducing monetary policy tightening, however gradually, and three others (including the Bank of Japan) suggesting they don't want to even start thinking about it until two years have passed.

This is a recipe for more uncertainty and stock market volatility. Markets being sustained by real private market demand are infinitely preferable to those being propped up by artificial demand via taxpayer cash. A resurgent U.S. economy will have knock-on positive impact all around the world, starting with the European Union, as it boosts demand. The Fed believes the U.S. economy is just about ready for a teeny tiny bit of tightening. Trying to counteract this across the Atlantic makes no sense. Time for another G20 summit to coordinate policy action. Or can we just lock the 4 central bank heads into a room and not let them out until they've agreed something sensible?

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