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It's like a design contest. Hardly anyone believes that the current tools allow central banks to repair a stalled global economy. Some of the biggest names in finance are trying to invent new ones.
The proposals to date – including recent entries by billionaire Ray Dalio and monetary policy maven Stanley Fischer – have one thing in common: they predict that once-powerful central bankers will assume a lesser role and collaborate with governments. .
This kind of stimulus was once taboo, partly because it might undermine the independence politicians attach to politics – and President Donald Trump is already threatening. History is full of edifying stories in which the blurring of borders between the central bank and the Treasury coffers has led to galloping inflation.
But currently, deflation is the big threat. According to a consensus, the next recession may have to be fought by direct and permanent injections of cash, often called "helicopter money" – and by the fact that central banks can not do it alone.
"Push a rope"
Monetary policy makers can encourage private actors to spend or invest, making the loan cheaper. By historical standards, interest rates are already close to the floor and credit cards of households and businesses are at their maximum. In the era of low interest rates, it is mainly governments that borrow.
What is resurfacing is "the old idea of monetary policy that sometimes pushes to break," Lawrence Summers, a former US Treasury Secretary and now a professor at Harvard University, recently told Summers. "We need to think more seriously about economic stabilization for mechanisms that involve direct stimulation of demand."
This is the code that involves tax policy. Thanks to their budgets, governments do not have to go further: they can open taps, invest directly in the economy or increase the purchasing power of consumers or businesses by reducing taxes.
The new thinking suggests that central banks can also move in this direction – an idea, known in the jargon of fiscal / monetary cooperation, that economists are now trying to flesh out. This could solve problems, and perhaps create new ones, on both sides.
Governments have often been criticized – often by those who oversee monetary policy – for their slowness in providing tax support, which usually has to be approved by hundreds of lawmakers who may fear an increase in public debt. Central banks can act faster.
Banks would have powerful new instruments. But they will probably have to accept this independence of politicians – jealously guarded, especially in the era of Trump's frequent attacks on the Federal Reserve and its president, Jerome Powell – – has limits.
This is the concern of a recent article published by BlackRock Inc. and co-authored by Fischer, the former Vice President of the Fed. According to him, monetary stimulus is no longer a way to boost the economy, while fiscal policy has not "pulled out of the game".
One solution is to combine them – for example, by letting central banks create money to finance the government's budget deficits. The challenge, according to BlackRock authors, is to lock in explicit rules for such "unusual in history" measures – so that central bankers retain their independence and can curb if public spending goes out of control.
Their proposal involves an emergency fiscal fund that central banks could activate when inflation is dangerously below target and there is no possibility of reducing rates. The money-tap would automatically close once the prices are back on track.
"A new kingdom"
The details differ, but many others have come to similar conclusions about what central bankers could do next – provided they obtain government authorization.
"In the next recession, QE will not be as efficient, interest rates will not be," said Bloomberg TV, founder of Bridgewater Associates LP, the largest hedge fund in the world.
"Then you need tax policies and monetization of the debt," he said. "We will enter a new kingdom."
Modern monetary theory, a school that argues that government spending and taxes are better tools to steer the economy than interest rates, has also been supported. MMT is relaxed about the monetary financing of budget deficits and does not see it as much differently from the sale of bonds.
Alongside the lack of monetary ammunition, one of the reasons for this major overhaul is perhaps the worsening of inequality, especially after the 2008 financial crisis.
As central banks moved from setting rates to restoring seemingly financial assets, they became more vulnerable to the burdens that their policies helped the richest, and went beyond their remit.
Frances Coppola, a financial commentator, has published a new book called "Advocacy for Popular Quantitative Easing" in which she recommends that the newly created central bank currency be routed directly into household or small bank accounts. companies. This type of stimulant will generate more growth and better distribution, she added, while addressing issues such as aging of the population and automation.
"Certainly higher"
Another factor of change is that the doctrine of central bank independence was coined at a time of soaring prices. But rich countries are now facing the opposite problem: deflationary forces. At some point this year, debt of more than $ 17 trillion – mostly in Europe and Japan – was less than zero.
Italian economist Guido Tabellini said that this context has forced him to change his mind. Professor of Economics at Bocconi University, Tabellini co-authored an article on the independence of the central bank in the 1990s, when the European Central Bank was created.
"The benefits of coordinating monetary and fiscal policies are certainly more important now," he said. It is also possible to relax restrictions on the financing of public debt – which can be done without sacrificing the independence of the central bank.
What Bloomberg economists say …
"Helicopter money is not a free meal," says Jamie Rush, chief European economist at Bloomberg Economics. "But it could still be the best value for money in the next crisis."
"The exact way the money gets into the helicopter will probably be less important than the way it is dropped. However, if explicit monetary financing of deficits has benefits, it is likely to result from policy coordination. "
It's not like there was no cooperation in the last decade.
After the 2008 crash, central banks regularly worked with governments. Sometimes they acted against the limits of their mandates – as when Mario Draghi, of the ECB, had put the central bank behind the public debt by promising to do "all it takes" to save the euro.
Collaborate – or fight?
But while the post-crisis environment has strengthened the theoretical arguments for collaboration, it has often translated in practice into particularly difficult relations between politicians and technocrats.
Trump's attack on Powell and Bank of England leader Mark Carney's disagreements with Brexit-friendly politicians such as Prime Minister Boris Johnson are just two examples.
It is in Japan that collaboration has been pushed furthest.
The Bank of Japan is a key player in Prime Minister Shinzo Abe's plan to revitalize the economy by combining monetary stimulus and spending. It now holds 43% of the national debt, which is the largest in the world.
"Whether you like it or not …"
In theory, this debt has not been monetized. In fact, most analysts think so and the sky has not fallen to the ground.
"The market does not expect the Japanese government to be able to repay this debt," Bank of America-Merrill Lynch strategist Athanasios Vamvakidis said in a report released in July. "The BoJ could just as well make it explicit."
Japan was the first country to reduce interest rates to zero and try quantitative easing. Given its close working relationship with the government, the BoJ could also provide a blueprint for the latest central bank ideas.
"The central bank's independence is increasingly resembling a brief historical episode that culminated at the turn of the century," said Joachim Fels, Pacific Investment Management Co.'s global economic advisor. "Where do we want it? no, get used to the new normalcy of central dependency. banks. "
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