Five Questions for Economic Policy after 2008
| DOI | http://doi.org/10.1111/1758-5899.12528 |
| Date | 01 May 2018 |
| Published date | 01 May 2018 |
| Author | Edward Price |
Five Questions for Economic Policy after 2008
Edward Price
London School of Economics Civil Service,
Government and Public Policy Alumni Group
Abstract
A pervasive belief in market efficiency, especially in self-correcting financial markets, was damaged by the 2007–8financial
crisis. A vision of functional, not dysfunctional, markets nonetheless remains at the heart of the economics profession. The
result is a degree of unclarity.
A pervasive belief in market efficiency, especially in self-cor-
recting financial markets, was damaged by the 2007-8 finan-
cial crisis. A new emphasis on financial re-regulation,
principally aimed at banks and designed at the international
level by the Basel Committee on Banking Supervision
(BCBS), has subsequently been worked into various national
and jurisdictional legislations.
Damaged, but not destroyed. A vision of functional, not
dysfunctional, markets remains at the heart of the eco-
nomics profession. This is true despite the post-crisis re-dis-
covery of economists such as Hyman Minsky (1919–1996)
who argued that crises are intrinsic to financial systems,
rather than exogenous shocks. And it reflects in our eco-
nomic policy framework and institutions. The post-crisis
macroprudential regulatory framework, for example, retains
an assumption that financial markets and private banking
entities are ultimately the correct agents for the distribution
of financial capital, however more stringently the official sec-
tor now treats the market for bank credit as a whole.
On the one hand, then, we retain a belief in the market
mechanism. But on the other, our use of economic policy
since 2008 suggests a lacking faith. The lingering fear of the
crash has lobbied for an interventionist economic policy
stance. Nonetheless, this stance is administered by institu-
tions and policy designed around market theory. The result
is a degree of unclarity. Here are five questions to ask.
Have monetary and macroprudential policy
worked in opposite directions?
Since the crisis, macroprudential policy dealing with sys-
temic risk in the bank sector seems to have worked in the
opposite direction to accommodative monetary policy and
varying forms of central bank quantitative easing pro-
grammes (QE) which aim at inciting the bank sector to
extend credit to the real economy.
Simply put, the first policy lever has apparently aimed at
a lower level of credit risk (the risk of default on loans or
interest) in the bank system, while the second at a higher
level. In theory, both better bank capitalisation and
accommodative monetary policy could work in the same
direction, namely, lead to higher levels of bank lending.
Thus, both policies might appear coordinated. Both macro-
prudential and monetary policy aim at the same goal: eco-
nomic growth. But the former is more mindful of the ex
ante economic cost of crises, and the latter more concerned
with the avoiding the eventual ex post cost of inadequate
bank credit.
The problem, then, is one of timing. Low interest rates
and money creation should stimulate bank lending in a
downturn, that is, they are countercyclical policies, but in
the short-term, macroprudential policy apparently works on
the same target, bank lending, in the opposite direction,
that is, has been procyclical.
What are the long-run effects of accommodative
monetary policy?
The essence of modern central banks’mandates is price sta-
bility, although of course the Fed also aims at maximising
domestic employment. On the first count, price stability,
nobody knows what the long-run impact of QE pro-
grammes’money creation and a decade of very low interest
rates will be.
Nobody knows, but that has not prevented a debate, one
particularly acute in the European Union where Germany
has repeatedly questioned the wisdom and legality of the
European Central Bank’s (ECB) monetary policy stance. This
is grossly reductionist, but the German argument is as fol-
lows: long-run inflation must follow so large an expansion
of central bank asset purchases, with an asset bubble also
another very likely result. The argument is about whether to
smooth output fluctuations today (with QE) or tomorrow
(with monetary restraint). Both sides argue their approach
will ultimately support growth.
The real issue, however, is that we must live through the
present era before being fully able to define it. Nobody
knows –whatever the current inflation and growth figures
in the EU –if the German position or some similar equiva-
lent will eventually prove correct.
Global Policy (2018) 9:2 doi: 10.1111/1758-5899.12528 ©2018 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 9 . Issue 2 . May 2018 285
Practitioner Commentary
To continue reading
Request your trial