Babbitt Column | Baishi: Can quantitative easing save the economy?

Author: Bai Shi Pan, National University of Singapore professor, dean of School of Finance Li Bai, former president of the Monetary Authority of Singapore Institute

(This article was originally published in Singapore Lianhe Zaobao)

After nearly 12 years since the global financial crisis in 2008, US Federal Reserve Chairman Powell has once again launched former Chairman Bernanke's "banknote helicopter"-an instrument of unconventional monetary policy, "Quantitative Easing (QE)" -Save money to save the economy and alleviate the negative impact of coronavirus disease on the economy in 2019. In addition to removing all traditional monetary policy tools, such as urgently reducing the target rate of the policy rate-the federal funds rate-by 100 basis points to 0-0.25 percentage points; reducing the deposit reserve ratio to zero; and reducing the bank's emergency loan discount rate With the increase of 125 basis points to 0.25%, and extending the loan term beyond 90 days, the Federal Reserve once again launched a large-scale quantitative easing program of US $ 700 billion and restarted commercial paper financing mechanisms to directly support unconventional measures such as credit flows to businesses and households. .

Such a rare combination of boxing moves, presumably the Fed estimates that under the dual impact of the epidemic on consumer markets and corporate production, leading to severe damage to corporate operations and depletion of funds, corporate liquidity and credit issues will also "infect" banks and other financial institutions. The financial crisis is likely to come one after another, so the Fed will have to reload!

At this moment, we may wish to review the experience and post-mortem review of the implementation of “quantitative easing” during the global financial crisis in 2008, which will help us to have reasonable expectations for the current launch of “quantitative easing” under the pressure of the epidemic.

"Quantitative easing" is usually in extraordinary times, especially when traditional loose monetary policies such as reducing the statutory deposit reserve ratio and rediscount rate, or performing open market operations, have caused the policy rate to fall to near zero ("cost easing "), The banking system is still unable to create credit, stimulate economic activity, increase aggregate demand, resulting in the ultimate means that may be faced with a severe economic depression.

One of the main reasons is that banks are particularly sensitive to credit risks, and their willingness to lend is particularly weak, resulting in particularly low lending activities. Banks have sufficient funds but have not hoarded funds to businesses or households, which is the so-called "liquidity trap." (liquidity trap). At this time, as was the case after the U.S. subprime mortgage crisis, the Fed expanded its balance sheet by printing a large number of new banknotes, from $ 700 billion in 2009 to $ 4.4 trillion in 2014. Treasury bonds support the government's expansion of fiscal deficits to stimulate the economy. They also purchase large amounts of non-treasury financial assets such as mortgage loans to support claims from banks and even non-bank institutions, increasing their liquidity, and directly affecting long-term market interest rates such as lowering mortgage rates to stimulate mortgage activity.

Therefore, one of the main functions of "quantitative easing" is when the bank does not play a role in creating credit currency and the currency multiplier is not ideal. In order to provide conditions for revitalizing economic activities, the central bank printed a large number of new banknotes and bypassed the banking system to economic entities such as the government. Enterprises and even individual households inject a large amount of capital, and increase the base currency (including cash circulating in the society), thereby increasing the general money supply, because the money supply of a country is the product of the base currency and the currency multiplier.

The central bank alone cannot save the economy

It should be said that before the outbreak of the epidemic, although the global economy was at a low level of growth, there was no threat of economic depression. In addition, after the subprime mortgage crisis, the deleveraging of the banking system and the strengthening of regulatory requirements on the bank's capital and liquidity, the overall strength of the bank has strengthened, and there has been no sign of a "liquidity trap."

However, this round of the epidemic has severely affected global consumption and disrupted corporate supply chains. It is likely to cause a large-scale corporate credit and liquidity crisis, drag down banks and financial markets, and then trigger a financial crisis.

Therefore, after the stock market fluctuated sharply, it decided to use non-conventional “quantitative easing” and commercial paper financing , in addition to traditional instruments, to inject a lot of liquidity into the market, hoping to prevent the stock market from collapsing. The short-term direct purpose is to We must guard against the financial crisis and maintain the stability of the financial market. However, it is an unreasonable expectation that the central bank's separate measures can save the economy. It is necessary to actively and strictly control the spread of the epidemic and cooperate with more targeted government financial assistance packages to boost consumption and restore corporate production to ease the impact of the epidemic .


Why is the central bank considered a "superman"?

Monetary policy, especially “quantitative easing”, seems to have become more and more important in recent years. It is easily adopted by the central bank, which is also regarded as a "superman" or "savior" to stimulate and save the economy. Why? The main reasons include:

I. The ruling and opposition parties may debate the formulation of fiscal policies and supporting facilities in Congress. For example, in the past, the two houses of the United States Senate and the House of Representatives had different opinions on issues such as the Buffett rich tax, reduction of military expenses, and "financial county cliff" Reached an agreement and delayed the time to rescue. In countries that implement democratic systems, the central bank is relatively independent and especially operates independently. It does not require parliamentary votes to determine monetary policy, so the central bank can make decisions more quickly and introduce emergency measures.

Second, the correct medium and long-term economic reform or economic restructuring plan is not easy to implement, because voters or vested interest groups may not accept it, or face social customs and cultural obstacles. For example, the Japanese government wants to encourage young housewives to go back to work to solve the problem of aging population and labor shortage. However, they face no performance in the face of obstacles such as social traditions and workplace culture; and economic reform or restructuring plans also take time to implement, and it is not easy to play a role in the short term.

Third, in the end, the central bank is "rich" because it can print new banknotes! What's more, printing new banknotes under the credit-based currency system today does not require gold as a reserve. The government cannot print money.

Therefore, many countries, such as the United States, Britain, Europe, and Japan, faced the global financial crisis in 2008, and avoided the importance. The government expects and even finds ways to influence the central bank to save the economy in the short term. Decision makers "(policymakers of last resort)!

Is the central bank's monetary policy really " Superman " ?

On October 5, 2011, former Federal Reserve Chairman Ben Bernanke told the Congressional Joint Economic Committee that "proposing fundamental policies to strengthen economic growth is outside the scope of the Central Bank." Bernanke also called on Congress to cut fiscal deficits excessively in the short term, even if it wants to reduce budget deficits in the short term, and said that promoting economic growth and creating jobs is a shared responsibility of the Federal Reserve and political leaders.

On February 27, 2016, the G20 Finance Minister and Central Bank Governor Shanghai Conference Communiqué said, "We will use all policy tools, including monetary, fiscal and structural reform policies, individually and collectively to maintain and enhance economic recovery. Monetary policy alone Unable to achieve balanced growth. The goal of our fiscal strategy is to boost the economy. We will flexibly implement fiscal policies to promote growth, job creation, and market confidence, while increasing economic resilience and ensuring that the debt-to-GDP ratio remains sustainable. Level. We will also adopt growth-friendly tax policies and public expenditures as much as possible, including prioritizing expenditures to support high-quality investment. We reaffirm the role of macroeconomic policies and structural reforms to complement each other in order to achieve strong and sustainable Support balanced growth. Accelerating structural reforms will increase potential growth in the medium term and make the economy more innovative, flexible, and resilient. "

The speeches of the above financial leaders made it clear that the central bank's separate measures will not save the economy. Its main role is to maintain financial stability and ensure that financial markets and financial institutions provide continuous and efficient financial services for the real economy. As far as the current epidemic situation is concerned, the recovery of the supply and demand of goods and services still needs the cooperation of fiscal and economic structural reforms such as restructuring the supply chain to achieve sustainable, healthy and balanced economic growth.

" Quantitative easing" brings new problems and new challenges

After the global financial crisis triggered by the subprime mortgage crisis, many countries launched the “quantitative easing” unconventional monetary policy tool. Although it has brought some effects, it has also caused policymakers and scholars to discuss the controversy of this tool. "Legal" legitimacy.

First, fiscal dominance. In order to boost fiscal spending to stimulate the economy, if the government does not want to raise taxes that are generally not welcomed by voters, it has to rely on national debt issuance. If the capital market has insufficient demand for government bonds, the central bank will need to print new banknotes to purchase them, otherwise the interest rates on government bonds will rise, which will be detrimental to the overall economy. As a result, the central bank has accumulated more national debt, which has led the central bank to "sink deeply" and have to support national debt.

Second, quasi-fiscal policy. During the global financial crisis, the Federal Reserve purchased financial assets such as mortgage-backed securities from Fannie Mae, Freddie Mac, AIG and other non-bank institutions, and directly allocated funds to rescue these non-bank institutions, resulting in significant distribution of monetary policy. The distributional effect blurs the distinction between monetary and fiscal policy.

Third, the "buyer of last resort". The central bank prints new banknotes to expand the balance sheet, and directly purchases securities held by financial institutions and other "risky" financial assets, and bears financial risks. They may suffer losses instead of performing short-term lending to banks with high-quality collateral such as “risk-free” government bonds, instead of performing the “last lender” of the central bank ’s traditional functions. May lead to the central bank being affected by politics and losing its principle of independent operation.

Fourth, moral hazard. The financial industry will lose the discipline of prudent business operations, especially when financial executives usually engage in high-risk business, increase leverage, create high profits and earn huge bonuses to meet private profits. In the event of a crisis, the central bank is expected to take a bailout.

These disputes need to be further worked out in the future, but it is somewhat alarming that the central bank needs to be cautious when adopting "quantitative easing."