Abstract
These notes are based on parts of a keynote address to the Fourth Annual Conference on Money and Finance at Chapman University on 6–7 September 2019. Quantitative easing (QE) policies have been pushed to extremes and extended well beyond their use-by dates to little plausible effect in achieving the goal of raising inflation and growth. Instead, they are damaging the interbank market (as exemplified by the liquidity crisis in September 2019), adding to the risk of financial crises in the future and taking pressure off policy-makers to deal with the real causes of poor investment, growth and deflation pressure. The shift in where investment is occurring and the special problems of Europe and Brexit are focused upon.
Highlights
Providing liquidity to banks and preventing runs on deposits was essential in 2008–2009 to avoid economic collapse
The general narrative goes something like this: having dealt with the liquidity crisis, central banks are trying to stimulate growth via low interest rates while flooding the interbank market with liquidity by buying up credit risks of all varieties
The inefficacity of monetary policy arises because the observed problems that it is trying to deal with have their origins in saving and investment decisions in the global economy that have been building for some time, since China’s entry into WTO in December 2001
Summary
Providing liquidity to banks and preventing runs on deposits was essential in 2008–2009 to avoid economic collapse. The general narrative goes something like this: having dealt with the liquidity crisis, central banks are trying to stimulate growth via low interest rates (which are even negative in Europe and Japan) while flooding the interbank market with liquidity by buying up credit risks of all varieties. This will force greater investment in risky assets thereby reflating the economy.
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