Today, the Federal Reserve, the ECB, Bank of Canada, Bank of England, Bank of Japan and the Swiss National Bank announced a coordinated action to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50bp.
This is especially important the European financial sector, which remains underfunded in US dollars and as such the move from the central banks easing strains in the European financial markets.
Judging from the initial market reaction this is rightly taken to be monetary easing – especially easing of US monetary policy – stock prices rose, the dollar weakened and commodities prices spiked.
Monetary policy, however, works primarily through expectations and since the six central banks who took action today have said nothing about what they want to achieve in terms of monetary policy targets we are unlikely to have a strong and long lasting impact of this. What we are missing here is the Chuck Norris effect. The central banks need to announce a target – for example that they want to increase NGDP in the euro zone by 10 or 15%.
I have already discussed a “crazy idea” to for the major global central banks to take action to ease monetary policy with a coordinated “devaluation” of the dollar, the euro, the yen etc. against a basket of commodities. Today’s action from the six central banks show that it can be done. Monetary policy is very powerful – so why not use it?
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Update 1: Scott Sumner also has a comment on the global monetary action.
Update 2: I have in a number of previous post argued against discretionary monetary “stimulus” and argued that NGDP targeting is not about “fine tuning”. In that regard Market Monetarists should be skeptical about today’s monetary easing even though it is helpful in demonstrating the power of monetary policy and is at least helps curb the crisis – at least in the short-term. See my earlier comments: “Adam Posen calls for more QE – that’s fine, but…”, “NGDP targeting is not a Keynesian business cycle policy” and “Roth’s Monetary and Fiscal Framework for Economic Stability”
Peter
/ November 30, 2011How can Europe be underfunded in USD when we have a free market and free prices in USD and Euro? Why can’t they borrow Euro and exchange them for USD and then buy some derivatives if they need insurance against changes in the exchange rate?
Benjamin Cole
/ November 30, 2011Time for aggressive and sustained monetary stimulus.
Also, somehow we need to change the premise that central bankers only screw up if there is inflation.
Central Bankers fail when there is not prosperity.
Alex Salter
/ November 30, 2011Monetary disequilibrium persists only because Chuck Norris allows it to persist.
Luis H Arroyo
/ November 30, 2011The movement is important because the reaction of markets proves that is the right direction. That doesn´t meant that there will be a follow up, but at least they have proved that money matters. Perhaps this didn´t be its intention!
Marcus Nunes
/ November 30, 2011It´s more of the same “cosmetic” action, taken ad hoc when the situation gets dire. Everything is “rolled back” as soon as the presure eases!
Luis H Arroyo
/ November 30, 2011Well, I´m afraid Marcus you are right…
David Pearson
/ November 30, 2011Lars,
I completely agree with targeting a commodity basket. The Fed has shown time and again that it can drive commodity prices, including gold. One way to carry this out is for the Fed and ECB to buy gold-backed or CRB index-linked bonds issued by the Italian and Spanish governments. The gold collateral would help reduce the political backlash from such a move.
The only problem is that commodity price hikes disproportionately impact levered, middle-income U.S. households and reduces their expectations of future real wage growth. It remains to be seen whether this “wage shock” has a net positive impact on real spending.
Lars Christensen
/ November 30, 2011Friend, you are all right. Ben you are right – this is “needed” and Luis you are equally right that this proves that monetary policy is very powerful. But, but David and Marcus – I am with you on this. We need a clear framework. I think my “crazy idea” would indeed work (even though I am not a big fan of internationally coordinated monetary policy).
In terms of the idea of targeting commodity prices I happy acknowledge that I stole the idea from Irving Fisher. This is a NGDP targeting version of Fisher’s Compensated dollar plan. Would it be a problem for the US middle-income households? Well, I don’t know – they would have higher job security, their wealth in the form of equities and property would probably increase dramatically. I think they would be pretty happy, but most importantly If the Fed introduced a commodity-FX-based NGDP targeting regime it would give much more stability in the US economy and equally important would stabilise the global financial market a great deal – and probably drastically reduce global currency volatility.
David Pearson
/ December 1, 2011Lars,
I read yesterday that the top 1% of households earn 50% of capital gains income. Also, the top 10% own about 70% of financial assets. A policy that relies on asset price gains to make up for real wage shocks may not work in the U.S. economy today.
If the Fed is going to raise asset prices, it better be housing.
David Pearson
/ December 1, 2011BTW, the job of shadow banks was to channel funds from wealthy households to middle class households. This channel is not functioning normally, which complicates the asset price strategy. Further, with corporate profits at peak and the WACC quite low, it is difficult to believe in a large “Tobin’s Q” effect.