Liquidate the Rentiers… on a Cross of Low Inflation?
State-of-the-art monetary theory in 1968 from Milton Friedman:
Paradoxically, the monetary authority could assure low nominal rates of interest-but to do so it would have to start out in what seems like the opposite direction, by engaging in a deflationary monetary policy. Similarly, it could assure high nominal interest rates by engaging in an inflationary policy and accepting a temporary movement in interest rates in the opposite direction.
State-of-the art monetary nonsense in 2014 from Martin Wolf:
High-income economies have had ultra-cheap money for more than five years. Japan has lived with it for almost 20.
From this weak start Mr. Wolf goes on to conclude that it is necessary either to have “big government” or to “wipe out the rentiers”:
Low interest rates are certainly unpopular, particularly with cautious rentiers. But cautious rentiers no longer serve a useful economic purpose. What is needed instead are genuinely risk-taking investors. In their absence, governments need to use their balance sheets to build productive assets. There is little sign that they will. If so, central banks will be driven towards cheap money. Get used to it: this will endure.
Cheap money? If only. Meanwhile, Gavyn Davies is worried about those naughty capitalists taking, erm, excessive risks:
The case for macro prudential controls is straightforward . During economic upswings, the behaviour of the financial system can become destabilising. Banks’ balance sheets are flattered by the expanding economy and low interest rates, so credit supply expands aggressively. This fuels the boom until risk taking becomes excessive, and even a moderate rise in interest rates produces a financial crash. Direct intervention in the financial system to head off these problems early, through increased capital and liquidity standards, seems to be justified.
So concerned is Mr. Davies that we might have a recession…
While an interest rate rise might be compared to firing a shotgun, macro prudential measures might be closer to a rifle shot. However, the separability of the two weapons raises many issues and difficulties. Both may need to be fired simultaneously in order to get the job done.
… that we might need a little bit of a recession to keep those risk-takers under control. What a fine mess this is.
HT: Marcus Nunes