“Carneynomics” doesn’t really roll off the tongue, does it? “Yellenomics” and “Draghinomics” sound catchier.
But they all amount to much the same thing, which is activism by independent central bankers — Mark Carney of the Bank of England, Janet Yellen of the US Federal Reserve, Mario Draghi of the European Central Bank (ECB) and others — as a substitute for effective economic policymaking by elected governments.
Eight years after the financial cataclysm that gave birth to it, many observers are asking whether this era of monetary interventionism should now come to an end.
The question was brought into focus by the drama of whether Governor Carney would return to his native Canada after just five years in office, in 2018, as he indicated at the time of his appointment, or serve a full eight-year term to 2021. It was evident that he had taken offence at implied criticism in Theresa May’s party conference speech, in which she said:
“While monetary policy – with super-low interest rates and quantitative easing – provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects. People with assets have got richer. People without them have suffered… A change has got to come.”
Ill at ease in the flashlight of our mischievous media and the hot seat of parliamentary scrutiny, Carney also clearly disliked the abuse he received from Brexiteers for his pre-referendum warnings of dire consequences of a Leave vote – followed by a second shower when his forecast turned out (for the time being, in the light of an unexpected third-quarter bounce) to be largely wrong.
No central banker likes to be dragged into politics, and Carney’s instinct must have been to pack up as planned in mid-2018. But soothing words from Downing Street — and the urge not to offer his own scalp to his detractors — persuaded him to add one more year, neatly extending his tenure beyond the projected end of Brexit talks in March 2019.
The markets, not wanting another element added to the current cocktail of uncertainty, breathed a sigh of relief. But a chastened Carney may rein back his public utterances, in tacit admission not only that his personal position is fenced in by his approaching departure, but that the Carneynomics of unconventional monetary action is rapidly passing out of fashion.
How so? Is Mrs May right that “a change has to come”, or was she playing to the gallery of Leave-leaning middle-class Tories, whose main beef with the Governor is that they no longer earn interest on their savings?
May was right to say that low rates and QE (the modern equivalent of printing money, whereby central banks buy in government bonds from private-sector banks and investment firms) provided post-crash emergency medicine.
It injected liquidity into a seized-up banking system, underpinned asset prices, and held borrowing costs down for businesses brave enough to ask for loans and lucky enough to find lenders.
The Bank of England says that its £375 billion QE programme between 2009 and 2012 contributed to financial stability and added around £50 billion, or 3 per cent, to UK GDP. Another £70 billion of QE was announced by Carney in August, in his gloomiest post-Brexit moment, along with a rate cut to a record low of 0.25 per cent.
A Deutsche Bank study found that the first round of QE in the US in late 2008 correlated to a sharp upturn in purchasing managers’ indices of business activity. But no such link could be found with later rounds of QE by the Fed, the ECB or the Swiss central bank — which also introduced negative official interest rates.
In effect, as observed by the Washington-based economist Adam Posen, formerly a member of the Bank of England’s Monetary Policy Committee, QE is “like a defibrillator”: you use it a couple of times to shock an economy back to life after a heart attack. But you don’t use it as long-term treatment for recuperation.
The same is true of ultra-low or negative interest rates, which offer temporary stimulus at the cost of long-term harm to pensions and savings. The impact of both QE and low rates diminishes the more they are deployed.
The biggest danger economists warned of, that QE and low rates would stoke inflation, never happened. But these days Carneynomics no longer makes much happen in the positive sense, either. And it’s unhealthy – in the eurozone in particular – for the wider public to go on believing that it does.
A further problem with both policies is how to reverse them when conditions turn for the better.
The theory of QE requires that at some future moment of surplus liquidity, central banks sell their bond holdings back to private investors, taking the artificially created money back out of the system. But few experts think that will ever happen.
Meanwhile, markets remain desperately nervous about the prospect of interest rates rising – which the US Federal Reserve tried with a quarter-point hike last December, but has since held back.
So we may be stuck for too long with low rates that have actually become bad for balanced growth – and with a legacy of QE that can never be undone.
Which is partly why there’s a growing consensus that the focus now needs to move away from central banks and towards fiscal policymakers — in our case, Chancellor Philip Hammond and his Autumn Statement on November 23.
So what should he do?
Public capital investment by Western governments – in the form of infrastructure spending – plunged after the 2008 crash. It is due for a revival here — if and when the planning system allows diggers to set to work on major projects.
Next, cuts in business taxes would not only be a stimulus to short-term growth, but a nifty competitive weapon for Britain in post-Brexit mode.
Encouragements to personal self-reliance, entrepreneurship, skills training, housebuilding and first-time home ownership would all also boost national confidence at a time of unease — and none of them can come, at this juncture, from the Bank of England.
In short, the Chancellor needs to grasp the initiative, because Carneynomics has definitely had its day.
