Good money follows the bad

THE financial crisis has turned central bankers from enforcers of monetary discipline into free spenders. The Federal Reserve and the Bank of England were off their marks fairly smartly with quantitative easing and are still at it.

But it took the arrival of Mario Draghi, an Italian with market nous, at the European Central Bank for the floodgates to be opened in euroland.

Having rescued Europe’s banks from disaster last time out, Draghi is back at it again with a further € 529.5bn of cheap three- year money through the ECB’S long term refinancing operation.

The short-term funding pressure on European banks has been eased. It would, however, be a terrible mistake if ailing institutions saw the easy cash as an excuse not to address capital shortfalls.

The new tendency of central banks to helicopter-drop cash naturally raises questions about future inflation. Many of us were brought up in the world of Milton Friedman-style monetarism which drew a direct line between excessive credit creation and inflation.

What is absolutely clear is that aggressive central bank policies since 2008-09 have led to a massive increase in the size of their balance sheets. In more normal times this would have created a powerful inflationary stimulus.

But with much of the private sector, from businesses to households, offloading debts as quickly as they can, much of the excess liquidity is being drained off. And there is still some way to go.

At some point (in the next couple of years) the Bank of England and other central banks will have to reverse policy. In the UK case this will mean dumping hundreds of billions of gilts back on the markets.

If policymakers were to unwind the stimulus either too late or not aggressively enough the risk is a credit boom will already have been unleashed, meaning high inflation.

The alternative, of acting too early and sending interest rates sky high, could kill off the recovery before it is properly established.

Sir Mervyn King is a lucky fellow. It is his successors, not he, who will have to suffer the consequences if the reversal of QE is badly timed.

A bigger question for Draghi is what is the ECB going to do with the billions of Greek and other peripheral country bonds it holds on its books? Everyone knows these bonds are not worth the paper on which they are printed. The ECB is in danger of being seen as an emperor with no clothes.

Cool Britannia

WHEN Adam Crozier took charge at ITV, after a less than shining career at the Royal Mail, there was great scepticism.

But after the penny-pinching of hotelier Charles Allen and the overexuberance of Sir Michael Grade, Crozier has brought some good sense to the broadcaster.

As a free-to-air network, facing an advertising drought and online challenges, there are going to be testing times ahead. So it is important the company puts down some deep foundations.

It has been doing this by keeping a close eye on costs and cash flow, and investing in production.

Crozier saw the core strength of ITV ought to be in its creative capacity. In the past, as a collection of federated but independent TV companies, ITV was known for its production values.

Much of that was lost in the frenzy of mergers which ended with Carlton and Granada coming together.

In 2011 there was an upsurge of new commissions, including 66 from ITV’S own studios and 45 internationally.

The network also had a stroke of luck with Downtown Abbey: classridden TV with real panache.

But it is to ITV’S credit that, while reality shows are still a mainstay, it regards quality UK drama as important.

ITV shareholders (including this writer) have been on a rollercoaster in recent times. The shares spurted in 2006 when a Goldman Sachs consortium sought control.

They then fell back into the doldrums as a lack of advertising, a big pension fund deficit, debt and the failure to meet the digital challenge came to the fore.

The shares, having fallen to just 17.5p in 2009, soared 8pc to 85.95p in latest trading. Can’t be bad.

Short-termism

JOHN Kay, one of few economists capable of writing in clear English, has boldly used his FT column to rail against casino banks.

Having now been let loose on short-termism in the City he has come up with the unsurprising conclusion that it is endemic, has been partly driven by quarterly reporting and that fund managers do not take their ‘stewardship’ role seriously enough.

The late Harold Wilson, who produced a similar report in 1980, might manage a wry smile. Plus ca change...