Monday, June 4, 2012

Ashwin — The Case Against Monetary Stimulus Via Asset Purchases

I’ve advocated many times on this blog that monetary-fiscal hybrid policies such as money-financedhelicopter drops to individuals should be established as the primary tool of macroeconomic stabilisation. In this manner, inflation/NGDP targets can be achieved in a close-to-neutral manner that minimises rent extraction. My preference for fiscal-monetary helicopter drops over negative interest-rates is primarily driven by financial stability considerations. There is ample evidence that even low interest rates contributeto financial instability.
There’s a deep hypocrisy at the heart of the macro-stabilised era. Every policy of stabilisation is implemented in a manner that only a select few (typically corporate entities) can access with an implicit assumption that the impact will trickle-down to the rest of the economy. Central-banking since the Great Moderation has suffered from an unwarranted focus on asset prices driven by an implicit assumption that changes in asset prices are the best way to influence the macroeconomy. Instead doctrines such as the Greenspan Put have exacerbated inequality and cronyism and promoted asset price inflation over wage inflation. The single biggest misconception about the macro policy debate is the notion that monetary policy is neutral or more consistent with a free market and fiscal policy is somehow socialist and interventionist. A program of simple fiscal transfers to individuals can be more neutral than any monetary policy instrument and realigns macroeconomic stabilisation away from the classes and towards the masses.
Read it at Macroeconomic ResilienceThe Case Against Monetary Stimulus Via Asset Purchases
by Ashwin

No one says exactly how the central bank is going to accomplish fiscal injection, however. Most of the more obvious means are beyond central banks' authority since this impinges on the fiscal authority. The fiscal authority must first delegate some of that authority to the central bank, a political matter that seems profoundly undemocratic and politically improbable.


Anonymous said...

This morning I heard a member of the BoE's monetary policy commitee (on CNBC) explaining his view that there was nowhere more for "demand-side stimulus" to go, as QE had done everything it could, and the only real remaining option was "supply-side stimulus" - i.e. increases in worker productivity.

It never seemed to occur to the chump that real demand-side stimulus (not fake stimulus) might actually increase productivity by re-booting industry and promoting competition.

Bob Roddis said...

A quantitative easing program focused on purchasing private sector assets is essentially a fiscal program in monetary disguise and is not even remotely neutral in its impact on income distribution and economic activity. Even if the central bank buys a broad index of bonds or equities, such a program is by definition a transfer of wealth towards asset-holders and regressive in nature (financial assets are largely held by the rich). The very act of making private sector assets “safe” is a transfer of wealth from the taxpayer to some of the richest people in our society.

My goodness. That sounds like me. Of course, the entire Keynesian Hoax was brought forth to accomplish exactly such a wealth transfer. And it sure worked, didn't it?

Anonymous said...

QE is demand-side stimulus? BoE officials are retarded.

Demand of what exactly, credit? The banks won't lend or people won't go into debt.

But is the only way demand can be stimulated? though private debt? Do these guys know what 'balance sheet recession' is?

They want to discredit keynesian economics just when they are not doing keynesian economics, but bankerism.

Tom Hickey said...

"My goodness. That sounds like me. Of course, the entire Keynesian Hoax was brought forth to accomplish exactly such a wealth transfer. And it sure worked, didn't it?"

1. Sounds like we agree on something. MMT said QE was a boondogle from the start and it's real purpose was to drive up assets higher than they would have otherwise to increase the wealth effect to drive demand and also support housing from collapsing.

2. How does this relate to Keynesianism, exactly? It is monetarism, which is designed to further enrich the wealthy. BTW, it was the brain child of Libertarian economist Milton Friedman.

Bob Roddis said...

Friedman believed in funny money and funny money dilution. He's not an Austrian and he was hostile to Hayek.

At the same time, we find Friedman calling for absolute control by the State over the supply of money – a crucial part of the market economy. Whenever the government has, fitfully and almost by accident, stopped increasing the money supply (as Nixon did for several months in the latter half of 1969), Milton Friedman has been there to raise the banner of inflation once again.