Certain central bankers are now coming out of the closet admitting that their favorite shenanigans—ultralow interest rates and printing money with utter abandon—can’t solve the very problems they were designed to solve, which has been obvious for a long time. What they’re not yet admitting massively, though some are starting to hand out hints, is just how much havoc these policies are wreaking.
“It would be a mistake to think that central bankers can use their balance sheets to solve every economic and financial problem,” said the Bank for International Settlements in its annual report released on Sunday. The organization, which groups together 58 of the world’s largest central banks, has on its board all the usual suspects: our very own Chairman Ben Bernanke and NY Fed President William Dudley along with ECB President Mario Draghi, PBoC Governor Zhou Xiaochuan, and so on. “In fact, near zero policy rates, combined with abundant and nearly unconditional liquidity support, weaken incentives for the private sector to repair balance sheets and for fiscal authorities to limit their borrowing requirements,” the report goes on. And “they distort the financial system.”
The numbers are stunning. Central banks, the report points out, printed at full tilt for years and bought often crappy assets that are now decomposing on their balance sheets—$18 trillion “and counting,” or ”roughly 30% of global GDP.”
Though it’s been nearly four years of zero interest rate policy (ZIRP) and serial Quantitative Easing (QE), the global economy is becoming more unbalanced, “and a safe financial system still eludes us,” the report said. Big banks continue to jack up leverage “without enough regard for the consequences of failure” because “they expect the public sector to cover the downside.” Leverage and trading have pushed the financial sector “towards the same high risk profile it had before the crisis.” And yet, there was good news: “Pessimism has become tiresome, so optimism is gaining a foothold.”
On Monday, Jeffrey Lacker, President of the Richmond Fed, came out swinging. “Monetary policy doesn’t have a lot of capability right now for enhancing growth,” he said, contradicting Chairman Bernanke who confirms every chance he gets that the Fed isn’t out of bullets, that in fact it will never be out of bullets, and that it can still get mortgage rates down further to goose the housing market off what appear to be a series of lower lows. Lacker already dissented from last week’s extension of Operation Twist and seemed to be in an uppity mood. “The impediments to growth are things that monetary policy is really not capable of offsetting,” he said.
It’s uncertainty that impedes growth at the moment, he said. Businesses “can’t do the math” on taxes, healthcare, etc., and so they hold back on investments and hiring “until Congress figures out how we get on a sustainable fiscal path.” A very pessimistic assessment as Congress, the way it’s going, is unlikely to ever figure that out.
“Structural factors” caused the recession—and the unemployment and housing morass—and those factors are still impeding growth, he said. So it would be a “mistake” to tie monetary policy to the unemployment rate. Same thing with the housing recovery. Vacant homes are the problem, not the already “awfully low” mortgage rates. And further monetary stimulus would “just raise inflation.”
That ZIRP and QE have done nothing for housing and the broad employment picture, and might on the contrary have helped prolong the nightmare, becomes obvious when the timing of these policies is superimposed on the graphs of the BLS Employment-Population ratio and the Case-Shiller home price index.
What I haven’t heard anyone at the Fed admit yet is that ZIRP and QE have actually coagulated into impediments to growth—for a whole litany of reasons. We now have dysfunctional capital markets where investors lend money to the government for free or even at a guaranteed loss. We have financial repression where yields are so low that investing in relatively safe assets, such as high-grade bonds and CDs produces a loss after inflation—an insidious tax on those who don’t want to risk losing 30% in the stock market just to stay ahead of inflation. And it’s a phenomenal subsidy for the other side that gets the money for free (or even at a negative cost). By eliminating income streams that consumers have been counting on, financial repression ends up decimating growth in the broader economy.