Too bashful to ride the helicopter


Dr. V. Anantha Nageswaran
17 Haig Avenue
Singapore 438873

Mobile: +65-97314261

The Editor
Financial Times

Dear Sirs or Madam,

Editorial writers take an ad-hoc view of things and ignore inconvenient evidence that their newspapers publish themselves. The FTView, ‘Monetary policy is not enough to beat deflation’ (March 15, 2016) is no exception.

Two days before this Edit was published, John Plender had written about the unintended consequences of ultra-loose monetary policy pursued in the West. US dollar debt held by emerging economies had doubled since the Fed introduced QE in 2009.

Economic textbooks have to be rewritten since we were taught that banks pay interest when they borrow from us (our deposits) and we pay interest to banks when we borrow from them. Now, we pay banks to deposit money with them and banks pay us money to lend to us! Has anyone had the humility to acknowledge what it would wreak? We only get glimpses of the costs.

Two days after this edit was published, FT carried a story on problems piling up for public pensions in the United States. The scale of unfunded public pension liabilities is much higher than thought because these pension funds use generous discount rates.

On Feb. 28, this newspaper carried the news that Philadelphia public pension scheme earned just 0.29% in 2015.

Now, central banks are pushing interest rates and their prospective returns into negative territory! Switzerland can borrow up to 20 years by charging a rate of interest on lenders! How to value unfunded pension liabilities now, with negative interest rates?

If pension funds had to earn their yield by investing into stocks such that the valuation of risky assets goes even further into stratosphere, will the Edit writers and central bankers guarantee that asset bubbles would never crash? Perhaps, in their hubris, they may even venture to offer precisely such a guarantee.

If monetary policy had not acted, things would have been worse. This is the standard ‘shutting up’ argument that policymakers and their apologists like this newspaper peddle. It is a scare tactic. By their very nature, counterfactual scenarios are impossible to prove or argue against. Advancing such arguments is to push everyone into an intellectual cul-de-sac.

How would central bankers justify the real costs they are creating versus the hypothetical costs of not acting? What is the criteria and what is the model?

Hope the Edit writers noted that, after seven years of holding interest rates at 0.5%, the policy rate is expected to stay unchanged all the way up to 2019. Yet, the UK faces lower potential GDP growth, lower business investment growth than anticipated earlier. No corporate CEO can hope to get away with such a colossal failure to turn his own promise into performance. Yet, not only Edits such as the above exempt central banks from such scrutiny but encourage them to wade further into the deeper end of the sea of unprecedented policies with uncertain and unknowable consequences.

The world will never know if things could have become better in a more lasting way if only central banks and governments had been more selective in their interventions, had operated with a sunset clause on their interventions and demanded change from those who could afford them and who were obliged to change their behaviour, given their contribution to economic troubles.

They never bother to answer these questions. Central bankers are beyond accountability. Alan Blinder, in his book, ‘When the Music Stopped’ scrupulously avoids examining the unintended consequences of actions of the Federal Reserve. Yet, even he could not avoid remarking that the US government and the Federal Reserve remarkably failed to extract any sense of accountability from bankers when they were ready to sign away their lives in 2008-09. A new government had just been elected in the United States on the slogan of change.

Usually, elites scoff at fiscal policy and worship at the altar of monetary policy. More public spending by a democratically elected and accountable government is anathema to them whereas untested monetary policy is kosher. However, these days, the intellectual sophistry of Edit writers is incomplete without a homily to the virtues of fiscal expansion. Yes, it would have been worth a try, years ago. Even when fiscal deficits widened, not much thought went into the application of extra fiscal spending. Now, seven years later, with low and negative interest rates wreaking havoc on public pensions and with no effect on lifting economic growth rates, higher public spending runs the risk of compounding the policy errors made already and the risk of jeopardising the already unsustainable medium term fiscal outlook of many advanced countries.

The Edit ends conveniently with a call for monetary policy to become bolder. Why this sudden bashfulness and where did this come from? Bring on the helicopters.

Thank you.


Anantha Nageswaran


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