Tag Archives: monetary policy

The effects of QE

21 Oct

Of all the new terms that have been invented since the beginning of the crisis in 2008, quantitative easing is perhaps the most bizarre. A purely technical term, it has entered into everyday language as ‘QE’. Monetary policy has taken centre stage as the main tool governments have to do something about growth and QE is it.

Tucked away in the small money supplement of the FT weekend was a long piece on QE. Its discussion of the effects of quantitative easing is worth commenting on. QE is basically a monetary stimulus programme, where central banks create money and use it to buy assets from banks and other financial institutions. The main thing central banks have bought are government bonds. Holders of bonds have therefore exchanged them for cash and that cash is what the governments hope will be spent in ways that stimulate the economy. QE was dreamed up at a time when interests were so low that they couldn’t really go any lower, making a traditional monetary policy response to an economic downturn impossible. The standard approach had been to cut interest rates in a downturn, raise them when the economy seemed to be overheating. Unable to do that with rates so low, QE was the radical alternative.

QE has been striking by its ubiquity: it has been the key policy response of the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan. What is surprising is how prevalently it has been used but how sceptical people are of its effects. The idea is that cash injected into the economy would generate new economic activity. There is little evidence, however, that QE has done that. Banks have tended to use the money to boost their capital ratios rather than to increase lending to businesses. Companies have sat on increasing piles of cash. QE in general is seen as having had little effect on the real economy.

Where has its impact been felt? After all, the US Federal Reserve has been buying $85bn a month of US government bonds since it started its QE. Intervention on such a huge scale cannot be free of effects. According to the FT, the main impact of QE has been on asset prices rather than on the real economy as such. These prices have risen considerably, boosting the wealth of those who own such assets. Predictably enough, that means the already very wealthy. The FT cites a Bank of England study that finds that in the UK, the top 5% of households hold 40% of the assets whose price has risen most because of QE. The central banks’ policy of printing money has inflated some asset prices, to the great benefit of those that hold them.

For everyone else, the effect has been more mixed. By keeping interest rates at very low levels, QE has obviously favoured the lenders over the savers. All those hoping to earn some return on their savings have been disappointed. Home owners, especially those with big mortgages, have been happy.  This view of QE helps us understand some of the curious features of this current economic downturn: as the real economy data continues to give cause for real concern (unemployment remains high, growth is anaemic, business investment remains very low), the price of fine art, the best wines and the high end properties in London, Paris and New York have all soared. With low interest rates and with central banks injecting so much liquidity into the bond markets, investors are looking for some return wherever they can. And that includes in a Monet or a large house in Neuilly or Richmond.

The best defence of QE cited by the FT was that things could have been worse without it. It returned confidence to markets and investors, and so helped us avoid the complete collapse that could have occurred in 2008 or 2009. As the FT admits, this argument is difficult to prove: “we just don’t know what would have happened without QE”. It is surprising that a policy with such obvious distributional effects has not been the subject of greater debate or disagreement. This is perhaps because the term itself is so euphemistically technical. Or because it has been carried out by central banks whose place is somewhat outside the terrain of partisan politics. It may also be that governments have been good at convincing people that there is no alternative to QE, which is tantamount to saying that they have no way of tackling problems in the real economy directly but can only work through asset prices.

This, of course, is not true. Governments could intervene far more directly in the economy. However, QE sits alongside the view that governments are fiscally constrained and need to reduce their outgoings as much as possible. Fiscal austerity combined with QE gives us the policy mix for the current period: a massive boost in the prices of assets owned by the wealthiest section of society and extensive cuts in government spending on public services. However technical it may sound, there is nothing ideologically neutral about QE and its effect.

 

Fiscal rules and election campaigns

24 Sep

As the UK Labour Party’s annual conference kicks off this week, ideas are beginning to emerge about what Labour will offer in the run up to the 2015 general election. One of these ideas is to have the country’s independent budgetary body, the Office for Budget Responsibility (OBR), to audit all of the pledges made by Labour in its election manifesto. Assuming that Labour’s tax and spend plans are found to be consistent with budgetary discipline and pledges on meeting deficit and public debt targets, the OBR would thus bolster Labour’s claims to responsibility and sound fiscal management.

This idea is nothing new for the Labour party. When Tony Blair carried his party to victory in 1997, he had promised to match Tory party spending commitments. This pledge had been intended to bury the long-standing image of the Labour party as a motley crew of profligate leftwingers. Over time, we have seen fiscal policy steadily depoliticized through the creation of fiscal councils and various fiscal rules, a development supported by the Left and the Right. The IMF estimated in 2009 that 80 countries in the world have adopted a fiscal rule of one kind of another. Debt brakes have been inscribed into constitutions in Germany and in Switzerland. In the UK, the OBR was created in order that government be made accountable to an independent body for its public spending. Elsewhere, fiscal councils with varying powers have become a common feature of the macro-economic policymaking landscape, as the table below highlights.

Fiscal Councils

Austria

Government Debt Committee (1997)

Belgium

High Council of Finance (1989)

Canada

Parliamentary Budget Office (2008)

Denmark

Economic Council (1962)

Germany

Council of Economic Experts (1962)

Hungary

Fiscal Council (2008)*

Netherlands

Central Planning Bureau (1947)

Slovenia

Fiscal Council (2010)

Sweden

Fiscal Policy Council (2007)

United Kingdom

Office for Budget Responsibility (2010)

United States

Congressional Budget Office (1975)

* Hungary’s fiscal council was dismantled in 2010

The European Union as a whole is organized around a set of budgetary rules that are policed and monitored by the European Commission, the so-called Fiscal Compact of 2012.  Monetary and fiscal policy are slowly starting to look alike as both policy areas come under the oversight of independent bodies of experts.

The idea of the British Labour party to submit manifesto promises to an independent audit takes this idea one step further. The message is clear: a promise made about spending by politicians is only credible if it has been overseen by a body of experts. Credibility and responsibility lies with apolitical bodies. Politics, itself, is the terrain of half-truths and misleading creative accounting.

One problem with this is the idea that once a policy has been given the stamp of approval by a body of experts, it becomes incontestable. Especially in the realm of fiscal policy, this is nonsense. Spending plans are notoriously subject to revision and change because they rest upon assumptions about the wider economy. Small changes in growth projections throw even the most carefully prepared and audited spending plans into disarray. That a party’s manifesto commitments are given the all clear by the OBR tells us little about what a party will do once in government. The OBR itself operates according to a set of assumptions about the maco-economy that are constantly subject to revision and change.

Another problem is that parties and governments that rely on monetary and fiscal rules set by independent bodies are in effect out-sourcing responsibility to these agencies. At the same time, these agencies – fiscal councils, central banks – only operate according to strict mandates set by politicians. The result is that neither the politicians nor the agencies accept the responsibility of making choices that are not right or wrong in any objective sense, but are based rather on what one believes is the right thing to do. This leaves us with a vacuum at the heart of politics. Ed Balls’ idea of auditing his campaign pledges brings that vacuum into the election campaign itself. Far from being a moment where rules are challenged and redrawn, the 2015 campaign risks becoming subject to the same rules and constraints that govern everyday politics today.

A word of advice to Ed Balls? It’s not because the OBR has given your policies the all-clear that voters will trust you. That will only come from building a direct relationship with them and engaging with them as citzens.

The time inconsistency of austerity politics

18 Mar

Mario Monti

 

At his last European Council summit meeting, at least for the time being, Italian Prime Minister Mario Monti gave some parting advice to his fellow leaders. Written up as a four page letter and reported on in the FT, Monti argued that the main problem with austerity policies is that there was too big a lag between the positive effect of reforms and their negative bite. Giving his own version of the old adage that things have to get worse before they get better, Monti explained that this doesn’t fit very well with the rules of the electoral cycle. The promise of austerity and supply-side reforms is that they bring gains by way of employment and growth in the long term. The difficulty is that politicians are judged according to pain they bring in the short-term. Something needs to be done to bridge the gap in order that reform agendas are not derailed, as he thinks they have been in Italy. From the perspective of the European Commission or the German Bundesbank, the issue is how to make sure that in the time in between enacting reforms and feeling their positive effects, susceptible policymakers are not tempted to give up on earlier promises and go for quick fixes, like expansionary fiscal policy or other Keynesian pump-priming tricks.

This discussion raises a number of issues. As a trained economist, Monti no doubt knew that his argument was a restatement of what macro-economists call the problem of time inconsistency. This is the notion that policy rules – such as a commitment to balance budgets over the medium term – lack credibility when they are made sequentially. As soon as a firm commitment is spread over a length of time, the possibility arises that short-term considerations will assert themselves. Such policy commitments are thus time inconsistent – they fail to hold over time and thus need to be insulated as much as possible from political pressures.

If this is Monti’s analysis, two questions arise. The first is what if the policy rule has no credibility in the first place – irrespective of whether we are talking about the short, medium or long-term? The commitment of EU member governments is that austerity combined with supply side reforms equals a return to growth. We are into our fifth year since the outbreak of the current crisis in 2008, austerity policies have themselves been in place for a number of years, up to three to four years in some countries. Austerity is nothing new, nor is the idea that supply side reforms boost growth and employment, and yet these policies are not being seen to deliver. Monti’s analysis of current difficulties in Italy and elsewhere, that rests upon the idea of extended lag between introducing reforms and securing their rewards, in fact places a great deal of faith on the idea that these reforms will eventually work. At issue today is not people’s short-termism. It is the more fundamental issue of whether cutting spending and raising taxes in a recession is any way to stimulate growth.

The second question is about what Monti suggests we should do. If we return to the idea of time inconsistency, then we find a very clear recommendation. Institutions should be created that make it as difficult as possible to renege on a policy commitment. This is the famous recommendation to favour rules over discretion. These institutions should be given the responsibility for contentious political agendas – like keeping down government spending, being hawkish on inflation, reform labour markets – in order that legislatures and electorally accountable executives are not tempted to go for short-term fixes.

The problem is that we are not in the 1970s anymore. Profligate legislatures have not been driving today’s budgetary crises. The contrary is true, as we see from the Netherlands through to the UK and Spain. Moreover, today’s crisis happened in a world of rules, not of discretion. Problems of sequential policymaking were hived off to independent central banks, independent budgetary offices, fiscal councils and an array of European rules and regulations in the field of macro-economic policy. As a result, the problem surely lies in something deeper and more fundamental than simply the institutional environment for elected policymakers. This won’t stop European commissioners and national politicians arguing for the strengthening of European rules. In fact, as the Fiscal Compact has shown, this seems to be the dominant framework with which European policymakers are working today. We should be wary of such explanations. A policy framework dedicated towards the curtailment of expansionary policies has given us a European continent saddled with debt and a global debt crisis. There is something more to this than the theory of the time inconsistency of optimal policy rules.

On politics and finance

30 Nov

Buried under the frenzy around the Leveson report was the British government’s coup of attracting Mark Carney, governor of the Canadian Central Bank, to London. Apparently ruled out of the running, much to the chagrin of those who felt he was the best man for the job, Carney has now been appointed as governor of the Bank of England and will take up the job next summer. For those who view these appointments as purely about expertise and experience, this is a great victory. Gone it would seem are the mercantilist days where nationality, wealth and government policy were so closely aligned. The cosmopolitan financial press, from the Financial Times to The Economist, are satisfied. Britain, it seems, is a pioneer in these international recruitments for national institutions: think of the English football team. That Carey was a Canadian certainly helped make him acceptable to the British establishment. He’s sort of one of us, after all, runs the sentiment. But the principle still stands that positions such as these are all about competence and expertise. There is no politics or partisanship here and the appointment of Carney, we are told, is proof of that.

It is also proof of a number of other things. One is that there is emerging a cadre of elite central bankers who move relatively seamlessly from one appointment to another. National boundaries seem less restrictive than in the past. This holds true to some degree at the global level, where competition for posts such as head of the IMF or the World Bank has become more intense. The old Bretton Woods division of the spoils between Europe and the United States is coming under serious pressure and may not survive the next round of appointments. And nationally, central banks are opening up with Britain leading the way. Curiously, the European Central Bank in this regard is behind the times: its appointments are rigidly based upon the principle of achieving balance between nationalities. The unfortunate Lorenzo Bini Smaghi was edged out of the ECB executive board because it wouldn’t do to have two Italians in there and no Frenchman. Draghi became director, Smaghi was out, and Benoit Coeuré was in. This seems rather old hat and overly political compared to the forward looking Bank of England. Whether other central banks follow Threadneedle Street’s example is unclear but the principle has been established and there is no short supply of expert central bankers.

It is also proof that the way we understand banking, finance and monetary policy today is entirely free of political principle. The struggle between banking and financial interests and those of elected representatives is a long-standing and epic struggle. There is nothing new there. But central banks have often been seen as exceptions. They are, after all, lenders of last resort and in that respect are eminently political institutions. Those critical of the ECB in the current crisis have often suggested that it’s role should become more, not less, political in so far as it needs to act in order to save the Eurozone from collapse. Yet the implication of Carney’s arrival is that the tie between central banks and national politics should be cut. This is a mistake. Carney may be Canadian but the Bank of England remains firmly part of the functioning and survival of the British economy. And the Bank of England should still be understood as an agent of national capital, in spite of who is running it.

Carney’s appointment also chimes with a more general feeling that politics is seeping out of macro-economic policy as a whole. Illustrative in this regard is the debate underway at the moment around who might replace Tim Geithner as US Treasury Secretary. One name that has been floated around, and who the FT considers a realistic outside contender, is Larry Fink. As head of the biggest asset management group in the world (BlackRock manages around 3.7 trillion US dollars of assets), Fink is a heavy-weight figure, as important as those running the big Wall Street banks. However, his entire background is in finance. He certainly has views about how the US economy should be run but to appoint Fink would be to give the job to an expert. And this is not a job as central banker but as Treasury Secretary, an ostensibly political appointment. Of course, experts have long been appointment to this position. There is even talk of Geithner stepping down and joining BlackRock and Fink moving in to take his place. Were this to happen, it would illustrate how firmly financiers dominate economic policymaking and how expertise in finance has become the baseline for political appointments within the US Treasury.

As we’ve argued before on this blog, expertise does matter in politics. But the overwhelming tendency today is to view macro-economic policy as a purely technical realm, rather than as one where technical questions co-exist alongside fundamental differences of political principle and alongside important moral questions. Such a tendency has the effect of shielding economic policy from public criticism and gives to public financial institutions like central banks a veneer of political and social neutrality. In fact, no amount of expert knowledge can obviate the need to make political choices. The most honest experts will say that various scenarios are possible and that the choices depend upon what outcomes we want. It is these outcomes that we should be debating, not which expert can magically solve our ethical and political dilemmas about what sort of society we want to live in.

The Van Rompuy draft

28 Jun

This evening, heads of government will discuss a draft proposal put together by the President of the European Council, Herman Van Rompuy, and his team, prepared “in close collaboration” with the heads of the European Commission, the Eurogroup and the European Central Bank. Though it seems the terrain is already being prepared for an inconclusive summit, it worth looking at Van Rompuy’s draft to see exactly what is to be discussed.

The draft is striking by virtue of its conditional wording: there are many ifs, coulds, possiblies and maybies. The whole draft reads as a tentative and rather speculative account of what reforms the EU could take on board if it wanted to move forward with fiscal and monetary integration. There is none of the hubris or confidence one might find in earlier drafts produced by European institutions, confident of their authority and of member state compliance.

There are nevertheless a few measures that seem a bit more thought out and have a whiff of probability about them. One is the integrated supervision of banks, the so-called banking union. This measure seems likely largely because member states can all agree on the point that national regulators have been found wanting. Instead of national regulators that sign off on generous assessments of the state of national banks, something more robust is needed. What is surprising is that the draft – with the presumed agreement of ECB head, Mario Draghi – singles out the ECB as the institution most likely to take on this role. This is surprising because – as Dermot Hodgson as shown – the ECB is generally rather reticent about any attempt at expanding its competences. Far from being a power-hungry supranational actor, the ECB has shied away from taking on new roles. Its sole concern is its price stability mandate: anything else smacks of back-handed attempts at imposing some sort of political oversight onto the bank, a terrible idea according to mainstream central bank thinking. Either it has accepted this new role because it does see it as an opportunity to increase its power or it has had this forced upon it in some way. One reason may be a convergence between Draghi, Van Rompuy, Barroso and Juncker, on the need to set up this banking union in a way that avoids any messy involvement with domestic politics. By placing it within the ECB, Van Rompuy notes in his draft, existing treaty law (“the possibilities foreseen under Article 127(6) of the TFEU”, to be exact) should be sufficient. A tidy legal solution to a thorny problem, and one that Draghi can no doubt appreciate even if it means a slight expansion in the ECB’s remit.

On the “integrated budgetary framework”, another important chunk of Van Rompuy’s draft, it is obvious what might be accepted by national leaders and what remains pretty unlikely. The key suggestion is that stronger measures to control the upward end of government spending need to be introduced. Van Rompuy suggests that in the end “the euro level area would be in a position to require changes in budgetary envelopes if they are in violation of fiscal rules”. This begs the question of what the sanction would be exactly – probably, fines of some sort – but it also makes clear how the evolution of economic governance in Europe is following well-trodden lines. What is being suggested here is really a constitutionalizing of limits to what governments can spend: exactly what national governments have been discussing for some time and what former French President Nicolas Sarkozy had proposed in France.

The push to make excessive spending truly illegal is hardly new and the ideas are familiar to anyone who followed the events of the 1990s and the Maastricht criteria. Overwhelmingly, economic growth is assumed to come from private sector activity, supply-side reform and from a focus on exports. There is to be a minimal role for public spending in any national growth strategy. National government discretion with regard government spending, and especially the idea that market instability should be compensated by discretionary uses of the public purse, has little role to play in the draft. That the fiscal excesses were more consequence than cause of the present crisis, and were initially the result of massive wealth transfers in the form of bank bail-outs after the Lehman Brothers collapse, is not taken into account. Even the part of the draft that mentions a “European resolution scheme” to be funded by bank contributions – “with the aim of orderly winding-down non-viable institutions and therefore protect tax payer funds” – pales in comparison to the tax-payer funded European Stability Mechanism that is vaunted as a possible “fiscal backstop to the resolution and deposit guarantee scheme”.

What remain far more tentative are the parts that describe the issuance of common debt and the creation of a fully-fledged European treasury: ideas that are being firmly resisted by Chancellor Merkel. And the mention of strengthening democratic legitimacy is an afterthought in a draft that focuses on measures intended to restrict as much as possible the room of manoeuvre for nationally-elected representatives.

There is little evidence of federalizing ambition in Van Rompuy’s draft. The most likely measure – the banking union – is proposed in a way that avoids having to rewrite any existing laws. The suggestions about common budgetary rules are driven by national governments so lacking in authority that they need binding external frameworks in order to impose any sort of fiscal discipline on their own societies. The reaction to this end of week summit will most likely be disappointment at what is not in the final communiqué. But judging from Van Rompuy’s draft, the real problem is what is in it.

Was there austerity? Is there still?

22 May

As the Euro debate trades one nostrum for another, shifting from ‘pro-austerity’ to ‘pro-growth,’ it is worth asking ourselves what ‘austerity’ was about. After all, as Tyler Cowen and others have argued, if austerity means an absolute decline in spending, then that hasn’t happened. As this graphic from Veronica de Rugy shows, there has been an overall slowing of the growth rate of spending, with slight absolute declines in Spain, Ireland and Greece from 2009 highs:

 

But the graphic does not show dramatic cuts in real dollars. So is all this talk of austerity a ruse or rhetorical flourish? Is ‘austerity’ simply defined according to one’s economic preferences? That is sort of Cowen’s view, at least insofar as Cowen believes there is no good definition of austerity, which is why the word austerity just ends up measuring the distance between the amount of spending one thinks is correct relative to the actual amount of spending.

While the Left might be inclined to jump at Cowen et al.’s approach to austerity, it is worth separating a few things. Data on overall state spending blurs together at least two distinct issues – changes in popular consumption (and expectations about that consumption) as compared with the role of the state in managing capitalism. Increases, or non-dramatic decreases, in state spending are perfectly compatible with across the board belt-tightening when it comes to popular consumption. War-time austerity, after all, is just that – sudden increases in overall state-spending, but simultaneous limitations on popular consumption. The graph below shows the rapid increase in US public spending during WWII despite belt-tightening at home:

Given the long-term trend over the twentieth century of the state’s increasing involvement in managing various aspects of capitalism, it would be very surprising if state spending dramatically declined. But it can still remain the case that the state is withdrawing from various welfare functions, or limiting its role in maintaining popular consumption – either through direct redistribution or through employment programs.

Consider, for instance, the fact that, over the same period that Cowen et al. think there have not been ‘savage cuts,’ we have seen the US, Spain and Greece cut public employment. The US government, for instance, has cut about 586,000 jobs since the recession began. As Doug Henwood pointed out a month ago (and the WSJ later agreed), state and local cuts to employment are responsible for about 1 to 1.5% of the unemployment. Put another way, were it not for cuts in public employment, the unemployment rate would be closer to 7%, not 8.5%. The Greek agreement includes cutting 15,000 jobs, despite a 22% unemployment rate. A similar story can be told for Spain. So it is worth separating discussions of austerity from overall state involvement in the economy. Spending can remain constant or even increase even as the state imposes new limits on its willingness to support popular consumption.

 

The Unholy Alliance of Monetary Expansion and Fiscal Austerity: More for those who have, less for those who don’t

16 Jan

Anyone observing the course of macro-economic policy in industrial countries over the past few years cannot help but notice an over-riding pattern: monetary expansion, fiscal austerity. This is an unholly alliance, in which the most regressive form of stimulus tacitly underwrites a fiscal contraction that punishes the least well off for the financial crisis and subsequent economic stagnation. (Skip the next two paragraphs if you already know the basic facts.)

Consider first some well-known facts. In the United States, the Federal Reserve has pushed interest rates about as low as they will go, and says it will keep them at the lower bound until 2013. It has also engaged in two rounds of quantitative easing, first buying in 2008-2009 over $1 trillion worth of MBS (Mortgage Backed Securities) and agency securities, then in 2010 it bought $600 billion worth of Treasury bonds, as well as the less significant Operation Twist. These measures have, in a narrow sense, been somewhat successful, with the Fed making profits on its original asset purchases, recently returning $77 billion to the Fed. The easing of the 2008-2009 credit constraints has acted as a kind of stimulus to the US economy by increasing the money supply, though strong doubts persist as to any further marginal improvements the Fed can make (e.g. Here and here). Meanwhile, while the Fed has pumped like crazy, state spending has come under serious attack. To be sure, there was the initial roughly $800 billion stimulus in late 2008, but this was almost entirely offset by contractions at the state and local level. The contractionary trend continued in 2011 such that government employment was “down by 280,000 over the year. Job losses in 2011 occurred in local government; state government, excluding education; and the U.S. Postal Service.” And then there is the whole super-committee, trillions of dollars in savings issue waiting in the wings.

We find a similar story in Europe. There have been in some cases multiple rounds of austerity in Greece, Portugal, Spain, Italy, Ireland, United Kingdom, France, Germany, and so on, despite record level Eurozone unemployment and economic economic stagnation, verging on recession. Meanwhile, despite initial recalcitrance, the ECB not only has pushed interest rates low, it has begun quietly expanding its balance sheet, offering nearly $500 billion in cheap 3-year loans, and after the recent success of Italian and Spanish bond auctions, has suggested it will loan more money in February. Fiscal austerity, monetary expansion.

Now one perfectly reasonable response to this relationship between central banks expanding the money supply and central governments contracting demand is to say “thank God for the Fed/ECB! At least there is one sane institution left intervening in the economy.” And as a response to those banging the drums of austerity, who believe in ‘expansionary austerity’, or to those who think the Fed is the root of all evil, this is a perfectly reasonable response. Austerity makes things worse, and displaces the costs of the crisis onto the worst off; the Fed, though it is not a progressive institution, is not the root of all evil. However, there is more going on here than that.

For one, in the European case, the tradeoff has been explicit. Draghi held out for as long as he could, on the grounds that Europe had to get its fiscal house in order before the ECB would become more adventurous. Moreover, as Henry Farrell has pointed out, while the raison d’etre of central banks to be insulated from political pressure, what this really means is that they are insulated from the kinds of political pressure felt by elected representatives, i.e. democratic political pressure. They are not from political pressure tout court. Instead, they are influenced by those like them, who speak their language of expertise and money. This makes it much easier for them to propose ‘solutions’ that hurt the majority – who do not so easily understand financial matters, nor tend to produce expert knowledge about it. Which is why it is easy for them to be so nonchalant about fiscal austerity, and why one hears very little about how regressive stimulus through loose monetary policy is relative to fiscal policy.

Just a refresher on that last point because it is relevant. Those best able to take advantage of low interest rates are those with positive net worth, not to mention financial savvy, which is for the most part the wealthy. And it does so without forcing them to invest in any particular way (one of the reasons why it can be of limited use as stimulus – borrowers can just park their money in T-bills, Swiss francs, or some other safe asset, rather than invest in job-creating enterprises). Additionally, it indirectly helps the wealthies by boosting the stock market, and thus those who gain most from increases in stock values (regardless of the underlying employment situation.) Moreover, as Doug Henwood has pointed out, monetary stimulus does the least to disrupt the existing class structure. It increases the ability of private borrowers to spend without actually altering the ability of average workers to earn or increasing their bargaining power with employers. Fiscal policy, on the other hand, especially something like jobs programs, puts a floor under wages, increases demand for labor, and thus changes labor-capital relations. On top of which, it challenges employers’ claims that they should possess exclusive control over investment.

The unholy alliance between monetary expansion and fiscal austerity is more intricate yet. A further response to those who want to present central banks right now as the only sane actors is that their expansionary activity deadens the impact of the insanity. That is to say, even when central bankers argue there should be more fiscal expansion, as Bernanke is reputed to want, their expansionary monetary policy conceals the full damage of the fiscal policy. It gives even greater room for fiscal irrationality. In all, the unholy alliance amounts in practice to a kind of policy combination that serves to redistribute upwards: fewer social services and public benefits for majority, alongside a monetary policy that directly or indirectly benefits the wealthy. And this combination does little to address the underlying sources of the crisis and continued lack of employment/stagnating wages.

Finally, and this is the most difficult part of the unholy alliance to tease out, there is a deep-seated, tacit ideological dimension here. The willingness of central banks to engage in massive pump-priming seems to us to be conditional in certain ways on a certain balance of class forces. The balance is one in which working class demands are weak, expressed not just in more passive unions with lower membership, but in the wider ideological defeat of the idea that public power could be used to meet the basic needs of all and even to socialize investment. Central bankers, once called in to lower the American standard of living by raising interest rates, have been freely keeping interest rates low now that weak labor bargaining power practically eliminates fears about inflation (a reality to which German bankers have yet fully to adjust.) It is harder to imagine an expansionary monetary policy, at least of the magnitude that we have seen, in the midst of a more robust fiscal response by the state to protect the bargaining power and living standards of workers, not to mention in the midst of significant labor militancy. Insofar as the absence of strong political support for expansionary fiscal policy registers the wider political weakness of the Left, the unholy alliance speaks to the ideological hegemony of conservative economic views (despite the hand-wringing of certain Austrians and ‘end-the-Fed’ Randians.) While the credit crunch was supposed to have discredited economic orthodoxy, in fact it seems to have created the conditions for its consolidation. The result: easier money for those who have, less for those who don’t.

Follow

Get every new post delivered to your Inbox.

Join 1,524 other followers

%d bloggers like this: