ADAM CREIGHTON

The Weekend Australian - - BUSINESS REVIEW - ADAM CREIGHTON

“Quan­ti­ta­tive eas­ing is theft. It is theft from the fu­ture, from the poor to prop up the rich. It is morally wrong”.

That was the take of Lib­eral MP Tim Wil­son, chair­man of the House of Rep­re­sen­ta­tive Eco­nomics Com­mit­tee, in par­lia­ment on Wed­nes­day, on a pol­icy which, a day later, the Re­serve Bank pub­licly en­dorsed.

“Quan­ti­ta­tive eas­ing is a pol­icy op­tion in Aus­tralia, should it be re­quired,” said deputy gov­er­nor Guy De­belle, in a speech in Syd­ney on Thurs­day night.

Cut­ting of­fi­cial in­ter­est rates is one thing, but QE — cre­at­ing money out of thin air to buy as­sets from banks in a hubris­tic at­tempt to ma­nip­u­late in­ter­est rates — would be a gam­ble in Aus­tralia, po­lit­i­cally as much as eco­nom­i­cally. Hot on the heels of the royal com­mis­sion into fi­nan­cial ser­vices, pump­ing gov­ern­ment money into the big four banks — even “for the greater good” — wouldn’t be a good look.

In fair­ness, though, QE has been all the rage for a decade over­seas, ever since the global fi­nan­cial cri­sis ren­dered con­ven­tional mone­tary pol­icy im­po­tent.

The US Fed­eral Re­serve has stopped buy­ing US gov­ern­ment bonds, but still holds a whop­ping $US2.2 tril­lion ($3 tril­lion) of them. As for March last year, al­most a decade af­ter the GFC, the Ja­panese, Euro­pean and British cen­tral banks were still mer­rily buy­ing up their own gov­ern­ments’ bonds as part of quan­ti­ta­tive eas­ing ef­forts — to the tune of $US125 bil­lion a month. Af­ter years of quan­ti­ta­tive eas­ing, more than a quar­ter of the $US32 tril­lion in out­stand­ing gov­ern­ment bonds in the US, euro area, Bri­tain and Japan are now owned by gov­ern­ment au­thor­i­ties.

The Re­serve Bank, like all cen­tral banks with their own cur­rency, has the power to cre­ate un­lim­ited quan­ti­ties of money. It could eas­ily start snap­ping up the $537bn of fed­eral gov­ern­ment debts out­stand­ing, and state gov- ern­ment debt too, if it wanted.

QE is meant to work by re­mov­ing long-term as­sets, such as gov­ern­ment bonds, from the mar­ket, which makes them scarcer and there­fore in­creases their price (and con­versely low­ers their yield, or the in­ter­est rates they pay). Lower long-term in­ter­est rates might make busi­nesses in­vest more, and if as­set prices rise, peo­ple might spend more, boost­ing eco­nomic ac­tiv­ity. That’s the the­ory any­way.

It’s been con­tro­ver­sial ever since the Bank of Japan first rolled it out in the early 1990s. Most stud­ies tend to ar­gue QE has in­deed been ef­fec­tive in re­duc­ing long- term in­ter­est rates, by around half a per­cent­age point. Cen­tral banks typ­i­cally ex­tol its virtues, but the im­pact on the broader econ­omy is not clear, and the un­in­tended con­se­quences are se­ri­ous.

For a start, eco­nomic growth since the GFC hasn’t been great, es­pe­cially on the wages front. The only “in­vest­ment” tak­ing place as a re­sult of lower long-term rates has been house­holds max­ing out on mort­gages. Busi­ness in­vest­ment has been chron­i­cally weak.

QE hasn’t caused the huge in­fla­tion de­trac­tors feared be­cause the new money hasn’t seeped into the real econ­omy, where QE has been tried. Banks typ­i­cally de­posit the newly cre­ated money they re­ceive for their bonds back with the cen­tral bank, re­ceiv­ing the cash rate in re­turn rather than a coupon pay­ment from Trea­sury. The bal­ance sheet of the pub­lic sec­tor as a whole, the Trea­sury plus its cen­tral bank, ex­pands and changes. Its li­a­bil­i­ties be­come bank re­serves rather than bonds.

“We also need to be hon­est about what hap­pens when you have quan­ti­ta­tive eas­ing,” said Wil­son this week.

What­ever its aca­demic mer­its, QE draws pri­vate banks even clos- er to the state, en­trench­ing the power of the ma­jor banks, crush­ing com­pe­ti­tion, not to men­tion dis­tort­ing the price of fi­nan­cial se­cu­ri­ties even fur­ther. If you think prices set in a free mar­ket are a virtue, this is a wor­ry­ing de­vel­op­ment. As well, cen­tral banks in Japan, the UK and Europe have barely sold any of the bonds they have bought, fear­ful of the ram­i­fi­ca­tions of re­vers­ing course.

The se­nior of­fi­cial who over­saw the Fed­eral Re­serve’s quan­ti­ta­tive eas­ing pro­gram told me in 2016 Aus­tralia would be “very il­lad­vised” to go down the same path, ar­gu­ing that QE sub­sidises banks and cor­rupts fi­nan­cial mar­kets with lit­tle ben­e­fit for the gen­eral pop­u­la­tion. “It’s not a tool that ben­e­fits the gen­eral pop­u­la­tion much, but rather over­whelm­ingly the fi­nan­cial sec­tor and the wealthy; the cost-ben­e­fit anal­y­sis is to­tally skewed,” said An­drew Huszar, then an aca­demic at Rut­gers Uni­ver­sity.

Even if QE boost GDP growth by a sliver of a per­cent­age point, if it en­riches a par­a­sitic elite fur­ther it might not work po­lit­i­cally.

Around the same time, for­mer deputy gov­er­nor of the Bank of Japan Kazu­masa Iwata told me that Japan’s QE pro­gram in­her­ently helped the fi­nan­cial sec­tor. “Ja­panese tax­pay­ers are, ul­ti­mately, sub­si­dis­ing bonuses and bank prof­its. But this is not easy to see,” he said. In­deed, the Bank for In­ter­na­tional Set­tle­ments in 2016 es­ti­mated trad­ing banks en­joyed a £1.85bn sub­sidy from the Bank of Eng­land’s first two rounds of QE be­cause the banks could re­li­ably buy newly is­sued bonds from the Trea­sury and sell them back to the BoE at a higher price.

Se­nior Re­serve Bank of­fi­cial Chris Kent in 2016 said the RBA might con­sider QE if it had low­ered the cash rate to 1 per cent. Thank­fully, given the cash rate is cur­rently 1.5 per cent, we ap­pear to be still a cou­ple of rate cuts away from any se­ri­ous QE de­lib­er­a­tions in Mar­tin Place.

The Re­serve Bank en­joys a bet­ter rep­u­ta­tion among the pub­lic than cen­tral banks in Europe, the US or the UK do. What­ever ben­e­fits QE might bring, best to avoid if it risks a royal com­mis­sion that reaches con­clu­sions more along the lines of what Ben Chi­fley wanted when the re­la­tion­ship be­tween credit cre­ation and gov­ern­ment were last for­mally con­sid­ered in Aus­tralia.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.