Business Times - 30 Jul 2009
By ANTHONY ROWLEY
TOKYO CORRESPONDENT
PITY poor central bankers as they agonise over when to withdraw the monetary stimulus they have injected to keep their recession-scuppered economies afloat. Or should we despise them for the generally abysmal job that they do in steering these economies between the Scylla of inflation and the Charybdis of deflation? I personally take the latter view. To me, the typical central banker is like a firefighter who congratulates himself on damping down a little, local blaze while a massive forest fire roars at his back and is ignored until it threatens to consume everything in its path. At that point, our panicked firefighter pumps in 'liquidity', which is like fuel that can spark a further conflagration at some point.
The localised fire is inflation in what we know as the 'general price level' - prices of goods and services. Central bankers have always trained their blinkered vision on these. The forest fire is inflation in the price of stocks, property and other such things, which central bankers long ignored or claimed was none of their business. Yet in creating a huge 'wealth effect', asset inflation drives consumption, output and investment to heights that threaten the fabric of society with overheating and hyper-inflation.
Only at that point do central bankers intervene with crude monetary tools to stop the blaze, unless (as with the sub-prime mortgage crisis) a financial collapse saves them the trouble.
Monetary policy, like economics, is a 'dismal science' which has not caught up with the modern world. I was reminded of this grim fact while attending a conference in Tokyo this week where experts debated the role that monetary policy played in getting us into our current mess and what, if anything, it can do to get us out of it again.
No one wants to defend investment bankers or the grasping and amoral way in which they enriched themselves from the securitisation boom; they are truly a 'sub-prime' breed. But it must be acknowledged that investment bankers could not have made so much hay if central bankers had not kept the sunlight of easy money shining for so long.
Alan Greenspan's name is invoked nowadays not as the Great Helmsman of the US Federal Reserve but as the man who claimed that a central banker's job is to clean up after asset conflagrations rather than trying to prevent them. He pumped liquidity after the collapse of America's IT bubble but was not there to clean up after this fuelled the sub-prime crisis.
I wrote about this subject a decade ago here in this column when I recalled asking Stanley Fischer, former deputy head of the IMF and subsequently a central banker himself, to recommend some literature on asset inflation. To my surprise, he replied there was virtually none then. I was even more astonished this week to learn this is still a virtually unexplored area.
The IMF has produced one or two papers on the subject and the Bank for International Settlements is beavering away on research now. But generally central bankers seem still to be in the dark about how to prevent runaway inflation in asset prices - let alone how to exit from the consequences of dousing it with huge liquidity injections.
The best that people like Hans Genberg of the Hong Kong Monetary Authority could do at the Tokyo conference (organised by the Asian Development Bank Institute) was to talk of the need for central bankers to 'lean against the wind' by restricting credit once they sniff the smell of asset price inflation. That's a bit like spitting into the wind created by a forest fire.
These issues are far from being merely of academic importance. Leading central banks have flooded their economies with financial liquidity (admittedly much of it under political pressure from panicked governments once the Great Recession set in) to an extent where it threatens to produce a Great Inflation once economic recovery sets in.
Nowhere is this fear more pronounced than in China where bank lending has run riot, with official approval, while stock and property prices are soaring - apparently out of control. Yiping Huang, a professor at Beijing University, appealed to the Tokyo conference for advice on how to deal with this. He received little of use.
In an age when super-computers can plot a voyage to Mars or prove the existence of sub-atomic particles, it seems odd that central banks cannot say when asset inflation threatens and produce sophisticated strategies to deal with it. It is even more odd that financial regulators cannot keep up with developments in financial technology that can threaten systemic collapse. Perhaps we do not pay them enough or provide them with the tools to be more effective. Or maybe it is just that central bankers are arrogant in assuming that their wisdom should not be challenged by ordinary mortals.
Fiscal policy can sometimes be as misguided as monetary policy but at least it is in the hands of elected representatives. Central bankers should be called to account.
By ANTHONY ROWLEY
TOKYO CORRESPONDENT
PITY poor central bankers as they agonise over when to withdraw the monetary stimulus they have injected to keep their recession-scuppered economies afloat. Or should we despise them for the generally abysmal job that they do in steering these economies between the Scylla of inflation and the Charybdis of deflation? I personally take the latter view. To me, the typical central banker is like a firefighter who congratulates himself on damping down a little, local blaze while a massive forest fire roars at his back and is ignored until it threatens to consume everything in its path. At that point, our panicked firefighter pumps in 'liquidity', which is like fuel that can spark a further conflagration at some point.
The localised fire is inflation in what we know as the 'general price level' - prices of goods and services. Central bankers have always trained their blinkered vision on these. The forest fire is inflation in the price of stocks, property and other such things, which central bankers long ignored or claimed was none of their business. Yet in creating a huge 'wealth effect', asset inflation drives consumption, output and investment to heights that threaten the fabric of society with overheating and hyper-inflation.
Only at that point do central bankers intervene with crude monetary tools to stop the blaze, unless (as with the sub-prime mortgage crisis) a financial collapse saves them the trouble.
Monetary policy, like economics, is a 'dismal science' which has not caught up with the modern world. I was reminded of this grim fact while attending a conference in Tokyo this week where experts debated the role that monetary policy played in getting us into our current mess and what, if anything, it can do to get us out of it again.
No one wants to defend investment bankers or the grasping and amoral way in which they enriched themselves from the securitisation boom; they are truly a 'sub-prime' breed. But it must be acknowledged that investment bankers could not have made so much hay if central bankers had not kept the sunlight of easy money shining for so long.
Alan Greenspan's name is invoked nowadays not as the Great Helmsman of the US Federal Reserve but as the man who claimed that a central banker's job is to clean up after asset conflagrations rather than trying to prevent them. He pumped liquidity after the collapse of America's IT bubble but was not there to clean up after this fuelled the sub-prime crisis.
I wrote about this subject a decade ago here in this column when I recalled asking Stanley Fischer, former deputy head of the IMF and subsequently a central banker himself, to recommend some literature on asset inflation. To my surprise, he replied there was virtually none then. I was even more astonished this week to learn this is still a virtually unexplored area.
The IMF has produced one or two papers on the subject and the Bank for International Settlements is beavering away on research now. But generally central bankers seem still to be in the dark about how to prevent runaway inflation in asset prices - let alone how to exit from the consequences of dousing it with huge liquidity injections.
The best that people like Hans Genberg of the Hong Kong Monetary Authority could do at the Tokyo conference (organised by the Asian Development Bank Institute) was to talk of the need for central bankers to 'lean against the wind' by restricting credit once they sniff the smell of asset price inflation. That's a bit like spitting into the wind created by a forest fire.
These issues are far from being merely of academic importance. Leading central banks have flooded their economies with financial liquidity (admittedly much of it under political pressure from panicked governments once the Great Recession set in) to an extent where it threatens to produce a Great Inflation once economic recovery sets in.
Nowhere is this fear more pronounced than in China where bank lending has run riot, with official approval, while stock and property prices are soaring - apparently out of control. Yiping Huang, a professor at Beijing University, appealed to the Tokyo conference for advice on how to deal with this. He received little of use.
In an age when super-computers can plot a voyage to Mars or prove the existence of sub-atomic particles, it seems odd that central banks cannot say when asset inflation threatens and produce sophisticated strategies to deal with it. It is even more odd that financial regulators cannot keep up with developments in financial technology that can threaten systemic collapse. Perhaps we do not pay them enough or provide them with the tools to be more effective. Or maybe it is just that central bankers are arrogant in assuming that their wisdom should not be challenged by ordinary mortals.
Fiscal policy can sometimes be as misguided as monetary policy but at least it is in the hands of elected representatives. Central bankers should be called to account.
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