The FT carried reports of the oddest central bank Governor speech I have ever encountered. Koruda likened the BoJ’s recent quantitative easing policy to a confidence trick. One that would fail as soon as people stopped believing, just like Peter Pan warned that he would crash if he stopped believing he could fly.
Analogy: imagine the head of a retail bank giving an interview from a swanky office: ‘know what? there’s hardly any of your money actually left in the bank! We’ve loaned it all out to people! And we don’t know if we are going to get it back! We just have to hope that not too many of you come at once to get your cash, because if you do, we are sunk!’
Other central banks have been much more circumspect. They understand the game the BoJ are playing. If expected future inflation rises, real rates fall, which encourages spending and the inflation today that will validate the increase in forecast inflation. But they have also conducted event and time series studies of the impact of QE; and poured money into conferences investigating its possible mechanisms. They stress that there is an underlying process that will generate stimulus, and know that it is dangerous to call forth expectations of success if there is nothing behind it all.
I think it would be fair to say that the median central bank has taken a more confident line on the effectiveness of these policies than would an expert with no vested interest.
Bernanke joked that QE is a policy that ‘works in practice, but it doesn’t work in theory’, downplaying doubts that he would have had with his academic hat on about what can be read into ‘working in practice’ without a convincing story [‘theory’].
The BoE, as I have written before, on many occasions put an over-confident gloss on their view of the effectiveness of QE. Draghi, seeking to convince markets to stop believing that Spain, Portugal and even Italy might leave the Euro, and have their debts redenominated, said that they would ‘do whatever it takes’, in the form of literally unlimited purchases of short-term debt. He could not have meant what he said, because there was surely no support for exposing EU tax-payers to unlimited corresponding losses. [See old blog].
But imagine what would have happened if he’d said ‘please, let’s just hope that the Euro stays together. Let’s just hope that someone does whatever it takes, whatever that might be.’
Koruda might be right. He might even think that he might be right. But if he does, he should keep it to himself, and keep polishing the emerging narratives about how QE might work, and putting aside some of the associated seigniorage for those research conferences.