Just when I thought I was out…they pull me back in.
In yesterday’s AFR, Alan Mitchell suggested that technocrats be put in charge of fiscal policy because technocrats were doing such a wonderful job of monetary policy. Well. When the rubber hits the road.
Consider this piece of wisdom from the Financial Times by Eric Lonergan:
Perhaps RBA Governor Lowe has been reading Lonergan who wrote:
If interest rates are a spent force, and finance ministries unreliable partners, who will save the day? And how, if the current global trade recession turns into something more pernicious? Three novel proposals are gaining support, all of which involve giving people money.
Just give people money. That will fix it. Gee. Why has no-one else thought of that before.
Here are Longergan’s 3 great ideas:
- central banks posting cheques to households.
- central banks consider giving money to the owners of the stock market by buying equities.
- dual interest rates which involves giving money to both borrowers and savers
Are Cat’s feeling warm in their hearts? The reason is that idea 1 is the Australia option (idea 2 is the Japan option and idea 3 is the Europe option).
On the posting cheques:
The Australian government sent households money during the financial crisis, and Australia avoided recession.
Hey. Rudd and Swan said it enough times that it must have been true. Forget that China’s stimulus (per capita) was a multiple of Australia’s and was used to buy Australian commodities and forget also that it was the hefty budget surplus and net government savings that were pissed away. $900 cheques saved Australia.
On the Japan option:
… already being practised by the Bank of Japan, and recently advocated by a fund manager at the investment firm, BlackRock, is that central banks consider giving money to the owners of the stock market by buying equities.
And who would have thought that a fund manager, who is remunerated based on the return on its portfolio, would support the central bank buying shares thus inflating their value. Who would have thunk it?
But on the Europe option:
The ECB’s programme provides the means to do precisely this. They can cut the interest rate on which they lend to banks, subject to these loans being extended to the private sector, and they can raise the interest rate paid on deposits. The evidence from economic history, and simple logic, suggests that if you boost household income in this way economies will recover.
Ok. For the beginners out there. This is a gross oversimplification, but the difference between the interest rate banks pay on deposits and the interest rate banks lend is the bank’s margin. It is how they cover their costs and make their profits. To concurrently increase the rate on deposits and decrease the rate on loans would compress the bank interest rate margin. To do this would require any combination of nationalising the banks, subsidising the banks, re-regulating the banks, increasing the risk of the banks. Basically flucking up the banks.
But here is an idea. Let’s call it the Harvey Norman JB HiFi Big W K Mart option. If there are 2 regulated interest rates; with the deposit rate higher than the borrowing rate. TAFKAS can borrow $1m at 0% and then deposit those funds for 5% and will promise to spend the returns on a flat screen TV mobile phone vacuum cleaner. TAFKAS will also buy retail business shares and wait for the RBA to step into the market to buy them at a higher price.
Fortunately Lonergan has suggested that central banks will require:
The next phase will require great political skill and intellectual bravery.
Good thing central bankers are unelected and unaccountable. But hey, free money, free money, free money.
If central banks are going to pursue such policies they need to at least give an appropriate intellectual acknowledgement to the Zimbabwean Central Bank.