Read an article which provoked some discussion on the desk, so thought of sharing it here - I wonder what you guys think…
No. The mandate of my country’s central bank is purely inflation management and thats what it should be. The Feds additional responsibility around full employment creates all sorts of complexities and social interference in setting monetary policy. I really really distrust monetary tools being use to address social issues (which profitability is one, perhaps indirectly). The lack of transparency yet the pure power of monetary policy is too dangerous to turn over to politicians.
is that you ron paul
Agreed in principle but shouldn’t there be pre-set timeline within which we should be judging the success or failure (i.e. profit or loss), of extreme measures like QE (of the size BoJ/US)? In the UK, we had a massive Funding for Lending Scheme, where BoE basically paid commercial banks, with a legal requirement that they’d lend it out to businesess - the results were brilliant. I feel it worked significantly better than buying gilts.
As an example, Japan’s been easing for god knows how many years - that they speak of a lost decade in japan. The guy who sits next to me is Japanese and he think we probably should account for CB P&L coz Japan’s balance sheet now is about 4x any of it’s counterparts, which is far too concerning to not ponder about how much they’ve lost, albeit just on paper. http://blogs-images.forbes.com/jonhartley/files/2014/11/CentralBankAssets.jpg
I can’t find the url but even IMF chief economist Rajan gave a lecture at Harvard talking about dangers of “competitive monetary easing”, which IMO could be curbed by assessing the damage i.e. track P&L.
He wishes, he has a big mouth whereas I have a big risk limit.
So how would your P&L tracker work? I’m failing to grasp this. QE should be judged by the fact it kept inflation near the target where it otherwise would likely have fallen to negative levels.
^ Well even I don’t know exactly how this could be implemented but we should have means of controlling competitive monetary easing - and I cannot think of anything a country can do except potentially keep a tab on P&L and size of their CB’s BS.
If not for P&L, then maybe steps that ECB took prior to QE could be considered? A 80-20 or 70-30 loss absorption scheme for systematically important banks/insurance companies…
Interesting question. I’m just shooting from the hip so bear with me…
The Fed’s balance sheet is approaching $5 trillion. Had the bonds they were buying been unprofitable, they would have less money to unwind when the time comes, perhaps easing inflation worries. But, as we all know, the Fed has made a killing on their purchases so they have essentially “created” more money. How are they going to unwind it and what happens when they do is one of the biggest unknowns out there right now. Seems like managing to take a loss would have made things (marginally) better.
QE shouldn’t be judged at all yet. Let’s wait to see what the Fed does with the extra $3 trillion they’re holding on to first.
Great question. I’ve been thinking about this myself.
I think the answer depends on a number of factors…
If a country is not a reserve currency - Yes, QE could matter. Printing money to buy local assets could lead to a lost of faith in the local securities market because the game will be rigged (i.e. central bank picks winners and losers), and because its debasing the local currency. A lost of faith by external investors in the local securities market could cause selling of local assets and lead via a vote of no-confidence. If the currency is a reserve currency then it might matter less because external currency holders have no choice but to hold USD/JPY/EUR/GBP (i.e lesser evil)
If a country has no public debt/private debt - No, QE will matter less. From an external view, their share of holdings in the local market is being assumed by the central bank and will become a semi-public asset. The internal mix of assets in a country didn’t change, just the composition of the holders of the assets.
An interesting thing to note -
In currency manipulation, a central bank will sell its own currency on the global market and buy other currency on the global market. How does this relate to QE buy selling currency to local market participants and buying local assets?
+1
Interesting point you raise about distinguishing b/w reserve currencies vs non-reserve.
Something relevant from Yellen’s testimony
http://www.bloomberg.com/news/videos/2015-02-24/yellen-strongly-opposed-to-audit-the-fed-proposal
Poloz was also blabbering about bigger responsibilities for central banks today. Ugh. Really dislike this direction.
I love Ron Paul. The guy has character. But does this guy really knows what the f…k is he doing auditing the Fed? I oppose the audit.
The Fed is already audited, by Deloitte it looks like. What exactly is Congress asking to have happen here?
fed prolly dont care about a lost. right now, they proly have a ton of interest rate risk (if rates rise) plus they got MBS that can easily default that can put them in the red. but that doesnt matter. cuz if shit does go down. u can print money for nada except maybe loss credibility to errbody who has a dollar bill.
does deloitte publish its audit of the fed lol
Just a bunch of politicians talking about a subject that they have no clue about. It happens twice a year where the Fed president must appear before Congressional hearings and every time it leaves you shaking your head.
Well its not entire pointless I think - to quell fears of the people who keep questioning (often unreasonably) Fed’s actions. That’s the nature of teh system we live in - would you rather have a system where the central bank answers to nobody whatsoever? I’d say that may lead to an awful concentration of power in one man (or in this case a nice gramy’s) hands.
I dunno about Deloitte but I’ve read the unaudited one http://www.federalreserve.gov/monetarypolicy/files/quarterly-report-20140930.pdf