QE5: QE farce wants to be Mousetrap

Mousetrap lg.jpgThe “hell-has-no-fury like a creditor financially-repressed” farce continues, apparently intent on outdoing the London Mousetrap  with this stubborn repeat of the ancient tragedy of debtors versus creditors ?

Or as bloomberg puts it “Anti-Draghi Revolt at ECB Still Won’t Die.”

The FT tells us that the bank’s “…monetary policy committee … advised against resuming its bond purchases. … (and that the) leaking of the confidential contents of the committee’s letter comes as opponents to Mr Draghi’s loose monetary policy fight a rearguard action to put pressure on Christine Lagarde. … It is one of the few occasions that the committee’s advice has not been followed in the eight years since Mr Draghi became president … However, the committee’s opinion is not binding and has been ignored at least four times in as many years by the council. … The ECB declined to comment.”

The Independent’s Hamish McRae  thinks the “… financial establishment …might be right … (to) have labelled Mario Draghi’s tenure a disaster for Europe”.

Meanwhile Count Draghila has flashed his teeth at German critics “for lacking courage”,  his former Lieutenant  Peter Praet  has appealed for calm and  The Ecomonist  concludes that “the critics’ timing seems calculated to influence Christine Lagarde.”

Ja! Says Austria’s National Banker Holzman as he assists “Draghi’s ass out the door with a swift kick” . “I am convinced that she has heard the dissenting voices, that she will take them seriously and will try to find a new approach here …(because) … the current monetary policy… is wrong and … a different policy is needed in the future.”

Us Not Ducks sm Q.E.[Qd] = E.Q.[Qs]

Across the pond  Mohamed A. El-Erian  weighs in on the Fed’s Evasive Quacking (or not) to opine that this is “… an issue that’s hard to resolve analytically … (but) … may provide insights into … a deepening conundrum ” faced by Central Banks.

Yes. Let’s call that deep analysis. And let’s call the conundrum the mousetrap. With ducks caught in it and the markets whinging and whining at them when they shouldn’t?  “Banks are supposed to plan for their own liquidity needs.”  scolds Minneapolis Fed’s Neel Kashkari.

After all, as El Erian points out, what matters is not whether it’s QE or EQ or whatever but that the “Fed’s purchases are intended to calm the … repo market”. He thus aptly reminds us what is the real currency of the equation: calm.

And there appears to be strong demand for calm.

As Germany is hitting the skids  the IMF’s new chief  Kristalina Georgieva discerns a ‘synchronised  global slowdown’. Even the newly  most competitive place on the planet feels the need to QEase .

The Sunday Times reminds us that “Global fears (were) uppermost in (the) minds of Fed officials”  and that “terrible interest rates …are only going to get worse”.

The downgraded “US economy is just one bad recession away from zero rates or worse” says Larry Summers  and,  Paul Krugmann warns that “We should be worrying a lot.”

But whilst Merryn Somerset Webb  argues that the “answer to our woes is to reverse quantitative easing,  Neel Kashkari calculates that “another rate cut maybe warranted.”

After all, never mind the “real economy”. And in the money markets the Fed’s quacking seems to have done the trick and is calming the curve  back to normal?  Or was it, as The Economist seems to suggest, the rate cut that seems “…to have switched off the bright, blinking recession-warning light which is the …” inverted yield curve ? (1) 

Or if we do care about the “real economy” maybe we should change the target of central easing?

Even The Economist who has firmly filed MMT under “wacky” now thinks that in “today’s strange new world … giving central banks a fiscal tool” might be the only way out and could involve “… transferring an equal amount into the bank account of every adult citizen when the economy slumps.” Such desperate heresies may have emboldened  The Guardian’s Larry Elliot  to break cover, run to the launching pad and wonder if  “With growth this tepid, is it time to give ‘helicopter money’ a whirl ?”

But can helicopters protect us from a  financial system which, according to the IMF, is now “more stretched, unstable, and dangerous than it was on the eve of the Lehmann crisis” ?

Are we trapped with no exit in sight? Addicted to QE forever? The only break the breakdown of the next crash? No dough left to cushion the blow?

To dethrone TINA we need to debunk the dogma of the status quo. Resist the lazy ad hoc fix and do some groundwork digging deep.

Like how did we even get here? Or even deeper: Why?

Why as in what was the point of the whole show again?

The old answer : GROW! There must be growth or we will die. Or so the story goes.

Except these days it often looks as if even that has been turned upside down : if we keep growing we will die. But let’s not (yet) challenge the fairy tale of eternal growth. Let’s just say that if the plot is all about growth, then mainstream equilibrium economics has lost it. They can’t tell when and why it fails, nor how or why it might return.

So how did The Mainstream lose the plot?

Their own answers always seem to point to the splinters in reality but fail to see the log in their own theory?  Except when occasionally critical hindsight gets in the way of dogma?

For a short real/post Keynesian history of what went wrong with Mainstream theory you could do worse than listen to grand old dame  Victoria Chick.

Catch up with Wicksellian Banking Theory  here:   “Wicksell’s Natural Rate”   Richard G. Anderson

“Ironically, Wicksell’s work laid the foundations that have led economists during the twentieth century to shift away from analysis of the quantity theory and, in some cases, to omit money entirely from their models. But, models based on the natural rate concept likely have some distance to go before they become useful guides to monetary policy.”

To get your ducks in a row on QE  you may want to pay attention to  “Whither Central Banking?” by Lawrence Summers and Anna Stansbury  which Mario Seccareccia  and  Marc Lavoie  consider  “… a breath of fresh air in the evolving world of central banking.” This is their pared down paper “Central Banks, Secular Stagnation, and Loanable Funds”:

“Since the 1990s, there emerged from the ashes of old-line monetarism … a new framework whose key feature was an understanding that all that central banks could really do effectively is to control interest rates through setting the target rate …
The new framework was inspired by Wicksellian ideas about interest rate setting that quickly spread almost universally throughout central banks internationally, as the latter redefined their mandate in favor of a single objective, usually a 2 percent inflation target.  …

Either implicitly or explicitly in this monetary policy framework, there was the view that … the underlying “natural” or “neutral” real rate was a parameter determined outside of central bank actions, by the forces of economy-wide “productivity and thrift.”
The theory behind this concept (is)… often referred to as the loanable funds theory … , was a very simple one: there exists some underlying real rate … determined … within the market for loanable funds through the investment/saving mechanism.

As long as these forces of productivity …(demand) and thrift (supply) … remain unchanged, the underlying real rate would also remain stable …(and fiscal) policy actions could only be destabilizing ….

The global financial crisis shook up this policy system. As a … reaction … central banks dramatically slashed … rates. … The problem, of course, was that there was believed to exist a lower bound … Consequently there … appeared a new “fiscalist” perspective espousing the need to pursue temporary discretionary fiscal policy actions because central banks were now constrained by the zero lower bound. Indeed, if the underlying natural rate had, for some reason during the global financial crisis, collapsed to a negative value, then monetary policy could no longer be effective, since central banks could … not reduce them any further …

Actually, there were policy attempts to puncture through the zero interest rate floor as in the Eurozone … where the ECB began to charge a mild … -0.1 percent. Other examples are to be found in Sweden and Japan. This quasi-Gesellian policy was based on the mistaken belief that these banks with positive settlement balances would try to rid themselves of their excess liquidity by lending these funds to creditworthy borrowers.

However, just like the policy of quantitative easing (QE) itself, these were simply desperate measures based on an erroneous supply-side logic of bank behavior. In reality, we would argue that this changes nothing to the actual logic of the monetary policy system, since a negative rate on positive settlement balances merely shifts the nominal interest rate floor from zero to -0.1 percent.

Whether a zero or a negative lower bound, this doctrine became the new policy framework consistent with the loanable funds theoretical construct. The cause of economic stagnation was now the rigidity of both nominal and real rates of interest, thereby preventing the economy from going back to its natural rate of output growth. Rigidities in interest rates by then had replaced the former presumed culprit of low activity: rigidity in nominal and real wages.

Lawrence Summers became an important advocate of this view. In a speech at the IMF in … 2013 … Summers … sought to explain the new … stagnation within this broad framework of the loanable funds theory, whereby monetary policy had become incapacitated and required fiscal stimulus. At the time, however, he still sought to explain this new normalcy of secular stagnation in terms of interest rate rigidity.

Now, however, he seems to have abandoned that view altogether and has embraced Keynesian and post-Keynesian ideas originating with the General Theory. For instance, nowhere in the article by Summers and Stansbury is there mention of the negative natural rate as the explanation for an incapacity of central bankers to deal with secular stagnation.

Is that because he has now abandoned the loanable funds theory, which remains at the core of mainstream thinking and to which he had previously subscribed? Nor do he and his coauthor suggest now that activist fiscal policy to combat secular stagnation is needed as a temporary measure to kick-start an economy stuck in a liquidity trap.

For Summers and Stansbury (2019), activist fiscal policy has become a permanent tool needed by governments to offset the forces of secular stagnation. For this, we applaud them for grasping what Keynes had long understood over 80 years ago …, whe(n) he opted for long-term fiscal policy actions to combat … secular stagnation. ….

(W)e very much believe that Summers and Stansbury are moving in the right direction of abandoning discretionary monetary policy as the favored policy instrument to combat long-term stagnation. Also what seems to be clear to us is that the economics profession must break away from these outmoded theories of loanable funds and the natural rate of interest in order to be able to pursue policies that will take Western industrial economies back to an era of full employment that was a characteristic feature of the early post-WWII era.”

Just in case you hadn’t noticed : We are floating off mainstream. We are starting to talk money.  Money as in too tight to mention..

Money not “printed” or eased out by central banks but credited by private ones. The type of  “credit money” that always stays off stage in mainstream debates? Slouched in the make-up room gazing at its own veiled reflection? Or, as some might slander, waiting to pay the speakers for not mentioning it?

But Ooops, how embarrassing. Everyone knows that sort of money doesn’t count. It’s just contracts. Pluses and minuses offsetting each other in a world of their own.

Hmm …

As my granny used to say: “People will believe anything! Especially if they want to?”.

In other words : Even the Nobel Prize doesn’t immunize you against confirmation bias.

Or, as Steve Keen puts it  concerning the conundrum of endogenous versus exogenous money:  “Many people, like Paul Krugman, get caught up on the “someone’s asset is someone else’s liability” truism & think that’s enough to justify ignoring banks and credit in macroeconomics. In Loanable Funds, credit does net out. With bank originated money & debt, it doesn’t”

And how much of all the money sloshing around is bank originated?

About 97%?

So obviously it doesn’t count for much then.

After all, we mustn’t succumb to the money illusion.

To be continued. Just follow the money …



(1) New to the inverted yield curve? Catch up here   or here \/



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