The current criticism, however, is focused on the post-GFC period. But once the crisis started to unfold, the actions of central banks are harder to fault. Just about everywhere, they moved interest rates quickly to a near-zero setting and kept them there. If policy-rate setting can be faulted, it’s that the rhetoric of the BoE and the European Central Bank (ECB) threatened to tighten too soon.
But this isn’t entirely true, and not even half true. The Federal Funds Rate did not go to near zero until late in the fall of 2008, well after the plunge in inflation expectations and NGDP that started in 2Q 2008. Even then, the Fed was criticized by the ECB for such a move which still has yet to lower its target rate to near zero. Has Mr. Grenville even looked at inflation and NGDP data for 2008? If he did, he would see immediately that the interest rate reductions came too late, and even then were not adequate to stabilize the fall, as NGDP and inflation expectations continued to fall through the end of 2009.
Mr. Grenville apparently also has not seen the paper written by Mr. Bullard in 2010, Seven Faces of the Peril, which postulates that according to Taylor Rule calculations, the FF rate would have needed to be negative 4 to negative 6 percent to stabilize the situation. Interest rate policy setting was no long appropriate for the situation.
It would be a wonder to assume that when the Taylor Rule is telling central bankers that money is too tight, even in terms of interest rates that somehow government spending and debt is the largest problem vexing the global economy, but Mr. Grenville does just that and manages to gloss right over the fact that most of the balance sheet expansions have been sterilized.
It would be absurd to expect monetary policy to fix the problems of the debt-ridden southern Europeans. The ECB has already loaded its balance sheet with worthless Greek paper; the inevitable write-offs will leave the ECB in need of recapitalisation. In the UK the BoE has bought up 30% of the total stock of government debt in an attempt to stimulate the economy. Nevertheless, total bank credit has fallen for the past two years, and lending to business is lower than three years ago. The response to increased base money has not been to expand lending, but to repay debt. The BoE is now looking for more direct ways to encourage lending, but this takes it onto tricky political territory.
In the US, QE seems to be losing its power; it is, after all, largely a psychological instrument. What is needed is a credible fiscal policy, with short-term stimulus combined with medium-term consolidation. Just because the political system is incapable of providing this doesn’t mean monetary policy can be a substitute.
I wonder if the thought ever entered his mind that perhaps the preferred policy tool is broken and that something else should be done. It is one thing to insist on using a policy tool that breaks when it is most needed to work, as in the case of the need for negative interest rates, but it is an entirely different situation, indeed, to insist that because that policy tool loses its effectiveness that nothing else should be or can be done and broken monetary policy is someone else’s problem. Even if it were the case that short term interest rates were the only way to conduct monetary policy, then what is with the hawkish rhetoric and the evocation of the inflation bogeyman? Where is the truth-telling about where we are in terms of inflation and NGDP growth, and the mea culpa for failing the price stability mandate continuously since the 2008 crisis? And what about the tacit acquiescence in the BIS report that monetary policy can do more, but if policy were loosened, the need to remedy deficits and debt would not seem as urgent? Monetary policy can either do something about the problem or it can’t. Which is it?
Now, perhaps we should go over why deficits and debt have been ballooning over the last few years. It’s all about loss of income and heavier debt burdens placed on the public from disinflation and below trend NGDP growth. It comes from real hardships being placed on real people who no longer have income enough to pay taxes and government could have, in no way, anticipated this. It is illogical to assume that social welfare spending should be reduced, as it was intended to be fiscal stabilizers to economic shocks and maintain at least a basic level of social welfare. Monetary policy error caused the majority of the shock out of addiction to a policy tool that is suboptimal, and irrational exuberance over the benefits of fighting inflation; and now the very same monetary policymakers who made the mess appear to be disgusted at the effects. They are not the only ones, for sure; try asking those who are still unemployed after three years of this mess, those who have lost a business they poured all of their blood, sweat, and tears into for decades, or kids just getting out of college and can’t find a job how this has impacted their lives. Just who the hell do these central bankers think they are?
For my part, this dodging of the problem by monetary policymakers is getting tiring, very fast. In whatever way possible, political establishments everywhere should be demanding that they fix this problem and fast. If they can’t or won’t do it, they need to resign or be forced to resign. There are too many innocent victims of this imbecility and it must not be allowed to continue.