Put relief in from below, not QE from above
Idon’t think quantitative easing (QE) is fit for purpose. Never mind the weak correlations between money spent and grassroots economic recovery, I’m struggling to see it as a cure for a viral epidemic.
What is its purpose? It may well have the effect of lowering interest rates, but I’m not convinced that alone will get economic growth going. Something else is required: confidence. Confidence in the real economy. Confidence of ordinary people, not financial market wizards.
It is the consumers who need to be shored up, not the players in the capital markets where the price is determined by supply and demand, not by the ultimate virtue of the capital invested. Most everyday consumers in the retail markets couldn’t tell you what the yields are on government bonds and probably have to pause and think every time they figure out the inverse relationship between price and yield.
It’s not because they’re stupid, it’s just because they don’t care. They don’t care because the impact of QE in the capital markets has a very diluted, if any, effect on their lives and consumer choices.
It would be very different if the money were given directly to the people who need it. They’d spend it more wisely than we often give them credit for (pun intended).
Imagine, at the time of the 2008 financial crisis, if the depositors had been bailed out directly, instead of “protecting them” by bailing out the banks that got us into the trouble in the first place through reckless position-taking. The individual depositors, once they’d funded any shortfall not met by their bank, would most likely choose a safer bank this time, and the bad guys would go bust. What’s wrong with that?
QE is taking on new proportions (to counter the economic impacts) as Covid-19 spreads across the world. Again, it is the little guys (in our world the small, medium and micro enterprises and their employees) and the informal economies, without any structural support, that won’t cope. Again, it is the stock markets and bond markets that are getting the benefit. Save
those, and you’ll protect only a few million people at most. Ignore small and informal business, and you’ll destroy more lives than the virus might.
The only graph in the US that is climbing faster than the recovering stock markets is the weekly jobless claims. The deflationary impact of the Covid-19 virus is likely to outweigh the inflationary hope of QE. Yes, it is.
The SA Reserve Bank has stepped up to the plate to provide relief for banks through lenience on capital adequacy and liquidity ratios in effect allowing them to advance further monies to business and the public at large. I wonder at the risk implications though. The end-needers aren’t being given any money they’re being allowed to borrow more.
It is difficult to administer and judge how much money must find its way to the individuals who need it most. Make it a grant, though, not a loan, pay everyone below a certain earnings threshold, and do it quickly. If we err in paying too much, too soon, so what? We’ll get it back from their employers or indirectly from taxes on increased spending.
At a global level, the IMF and World Bank start coming into play. This has to be a last resort, as it incrementally, and often irreversibly, undermines sovereign independence. Let’s borrow specific purpose money and, for goodness sake, don’t give money to those who got countries into trouble in the first place.
As far-reaching and personal as Covid-19 is going to be for the economies of the world, it may just prove to be the control-altdelete we needed to finally draw a line behind our divided past and walk towards a new future together.