How did we get here? The rise of unconventional monetary policy
- James Athey
Before COVID-19, unconventional monetary policy had already become the ‘new norm’.
Growth and inflation had disappointed the expectations and desires of central banks in the US, Europe, the UK, Japan and Switzerland – among others.
Countries that were already running large deficits or had a lot of debt were also limited in what they could do with fiscal policy – so heavily relied on monetary policy instead.
Every country tried something different. Probably the most extreme in terms of asset purchases and quantitative easing were the Bank of Japan and the Swiss National Bank; both bought equities, which, on the face of it, was quite an incredible state of affairs.
The role of financial markets is to make efficient capital allocation decisions – that’s precisely what capitalism is all about. But when the government starts making capital allocation decisions, that’s the command economy; or communism; or socialism – or one of those extreme-left, centrally-planned, ideologies.
So, within a capitalist system, it is remarkable to have essentially a branch of the government making decisions about which companies should receive capital and how that capital should be priced.
Role reversal
In a free and openly traded market, this is essentially the government playing the role of the private sector, without any democratic legitimacy.
What we have seen since the rapid outbreak of the coronavirus, and the associated health emergency, is an extrapolation and acceleration of this pre-existing trend of monetary activism.
The difference this time is the size, scope and aggression of these actions – coupled with the similarly combative expansion of fiscal policy. In the short term, these interventions have acted as a salve for financial markets, which had seen a breakout of volatility as the scale of the economic shock became clear.
But there are medium to long-term risks. We are playing fast and loose with money in a way that has never ended well when tried in other places, at other times. Unbridled money printing with huge and expanding budget deficits has seen currency collapses in the likes of Zimbabwe and Venezuela in recent years – and a myriad of other nations throughout history.
How policy makers manage further expansions, and then ultimately the unwinding, of these emergency programs will be critical to their perceived successes – and the extent of unintended consequences.
Read our feature on unconventional monetary policy on page 45 of the Spring issue of Chartered Banker magazine