Unwinding Quantitative Easing Is A Political Act

At his press conference announcing the Bank of England’s Inflation Report in February this year, Governor Mark Carney joked that the central bankers’ 15 minutes of fame, a reference to the pop artist Andy Warhol, was about to end after Brexit in the U.K. and the Trump victory in the U.S. presidential elections had brought to power the politicians who promise fiscal policy to finally end the economic malaise caused by the 2007 crisis. Carney was partially correct because since Trump has become president the stock markets in the U.S. have moved in reaction to his announcements and twitter wisdom and have lost interest in Yellen and central bankers. However big weapons and bazookas to move and shake the markets are still in central bankers’ hands and about three months after Carney’s joke two serious newspapers in the U.K., The Guardian and Financial Times, called central bankers into action.

On May 4th, the twentieth anniversary of the Bank of England gaining independence in setting interest rates, a Guardian leader commented that “the Bank has become more powerful and more political but not more accountable”. A day later the leader in Financial Times warned central bankers (once again) about stock market bubbles that quantitative easing has caused. Almost a decade of quantitative easing and unconventional monetary policy by central banks in the U.S., the U.K. and the eurozone has not produced investment-led economic growth and a stable financial system that can function independently without massive central bank support. After trillions of bond-buying and liquidity injection to the markets the balance sheets of central banks have turned into a giant peculiar sovereign fund financed by digitally printed money with dogmatic economics stamped on it. Markets lost their freedom to independent central banks.

We now have something that can well be described as central bank-led capitalism. And now with the U.S. Federal Reserve not sure about how to unwind the portfolio it has acquired under successive quantitative easing bouts without causing serious disturbances in the financial system, our financialised capitalism looks eternally dependent on central bank action. Of course, the cost of such dependence on central banks, who are not democratically accountable and whose economic models are cognitively suspect for most economists including themselves (see the publications of Bank for International Settlement for example), has been and will continue to be very high for the society.

The IMF’s World Economic Outlook report in April 2017 forecast better economic growth but underlined two well known structural problems in high-income economies: declining productivity and increasing inequality. Whatever meagre economic growth we have recently witnessed in the Western economies it was not due to private investment or wage growth. Cheap consumer credit and artificial wealth effect from stock market and real estate bubbles that central bank policies have produced have created an unsustainable growth in output and low wage jobs. As I have explained in my study for FEPS (Foundation for European Progressive Studies) quantitative easing fails to channel credit and capital to the productive economy when shareholder value-driven private firms in a financialised capitalism prefer share buybacks and mergers and acquisitions to enrich top managers. Money managers, on the other hand, prefer to play the game of carry trade by borrowing in low-cost U.S. dollars, Euros, and Japanese Yen and investing in higher yield emerging economy financial assets and rising stock markets in high-income economies. Finance feeds finance under quantitative easing rather than feeding the productive economy. This is a dysfunctional economy that generates bonuses for the managerial class and wealth for real estate and financial asset owners but inequality and precariousness for the rest of society.

Central banks have gained and exercised unprecedented powers to carry out monetary policy to achieve economic welfare through GDP growth and job creation since the 2007 crisis. However, these extraordinary new powers to intervene in the financial markets have not been balanced by a new governance mechanism that makes central banks accountable and transparent to the citizens in a democratic way. What we need now is not an outdated central bank independence that was designed for controlling inflation but an enlightened and democratic governance mechanism for central banks in a financialised and global economy. Such governance mechanism should aim for the following:

a) Dogmatic and cognitively suspect economic models of central banks should be democratically scrutinised by an independent committee of economists and social scientists that represents the full range of society and economic knowledge.

b) Central banks should provide quarterly reports that show not just the broad quantitative results of their policies like GDP growth, unemployment, credit creation, etc. but also a detailed range of measurements that include labour participation, wage growth, private investments, asset inflation, pension fund performance, inter-generational and regional inequality, etc.

c) A new parliamentary committee examines whether there is a conflict of interest in central banks carrying out prudential supervision of banks, macroprudential supervision of the financial system and executing quantitative easing and other unconventional monetary policies. This same committee should consider whether new independent public agencies need to be created to devolve centralised roles and powers of central banks.

In short central banks and their unconventional policies including QE have become a threat to our democracy and enlightenment values. We need to move from an archaic institutional set up where risk is centrally priced and distributed by cognitively suspect economic models of central banks to a new institutional structure where monetary policy and regulation of financial markets are scrutinised by a mechanism of democratic governance. Central banks should be made accountable to citizens through democratic processes.

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Radix is the radical centre think tank. We welcome all contributions which promote system change, challenge established notions and re-imagine our societies. The views expressed here are those of the individual contributor and not necessarily shared by Radix.

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