Four years after the great crash, central bankers on both sides of the Atlantic are still seen as the main architects of recovery.
It’s not enough that they have loaded up their balance sheets with trillions of their own country’s sovereign debt and held interest rates at near zero percent for over 3 years now, equity markets still jump up whenever there is the merest whiff of yet more “quantitative easing” and commentators continue to ask them to do yet more.
Central banks indeed needed to act in the way they did, to halt an ever bigger economic meltdown after 2008. That is not to say that their action has not merely pushed the dirt under the carpet and stoked up more trouble for the future.
The implicit currency devaluation caused by QE [learn more] risks driving up inflation [learn more], and it will be very hard to unwind it without causing more market nervousness. The unwinding process may take years. But there is no doubt that the dramatic actions taken by the Fed [learn more], BoE and ECB [learn more] were necessary to prevent recession[learn more] turning into depression. The problem now is turning stagnation into growth.
But the economy isn’t a one-factor model. The policy response needs to be multi-factor.
To get an idea of what’s required, just look at London 2012 gold medallist Jessica Ennis. In essence her discipline involves being jack of all trades, and master of all of them.
The technique and expertise required to be Olympic standard at the shot put is very different to that required to accomplish the long jump. And for a contrasting requirement in aerobic strength and fitness, one would be hard pressed to find one greater than the 100 meters hurdles against the 800 meters. (Ennis’s time at the 100 meters hurdles is so world class she could easily have entered the standalone event at the Olympics and made the final.)
She isn’t just a sprinter though, she also won the 800 meters event in the heptathlon. In many respects Jessica Ennis is the world’s perfect athlete.
To restore economic growth requires policy makers to adopt the all-round perfection of Ennis. Those arguing for yet more QE, or for more bond buying from the ECB (although there is a strong political angle with that one), or for Keynesian style public spending and infrastructure projects to boost output forget that it is not only the demand side that is at issue here.
What the monetarists liked to call the supply side also needs to be addressed. Future growth will be private-sector led, not public sector led, when public sector finances are already so stretched as to make increased government spending simply untenable.
To assist the private sector, we need policy action on the supply side, to incentivize capital investment and jobs creation. Steps such as simplifying tax policy, freezing payroll taxes for all new hires, making the process of business start-up easier, not harder. The EU economy is crying out for action on the labor market front.
With zero percent base rates, the cost of credit is not an issue, and if you provide a framework that encourages entrepreneurs to invest, they will be back in the market for credit.
Policy makers need to stop relying on central banks to bail them out of trouble. They need to master more than monetary policy and the demand side. Just take a leaf out of Jessica’s book…
Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland.
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