Monetary policy is tired, and so are we
After attending the largest meeting of central bank governors, the Jackson Hole Symposium in the US, Carlos Costa, Governor of the Bank of Portugal, can’t do much with what was discussed due to the almost total lack of power of the Banco de Portugal in this area; but that does not mean that the lessons learned are not important.
As was discussed, the world’s central bankers and economists (including Portuguese economist Ricardo Reis) are coming to the conclusion that monetary policy does not have the power to increase inflation or boost economies. No matter how much interest rates are reduced or how much private debt is bought in the financial markets, there is no way of making it work. Little is said about why it does not work, but the signs point to the cause of the problem being the implementation of government budgets (especially in Germany) or even the famous Helicopter Money.
What is taking years for austerity-supporting institutions and economists to discover has been said for years, elaborately, by the Left, that have got tired of warning of this outcome.
Throwing money directly at banks doesn’t work, because banks want to reduce their balance and are more likely to invest it in speculative ventures than the real economy. On the other hand, the over-indebtedness of businesses and households, which is made worse by austerity policies, prevents the recovery of economic activity. To a large extent, the only thing left is investment funds, whose shares are bought and sold for financial gain. Passos Coelho had a habit of thinking this was investment, but in reality it is not. In essence, it’s buying an investment that has already been made.
What then would be the solution to this problem? Governments. And this is precisely the answer that has been given by the most celebrated economists, from Krugman to Larry Summers. When private funds fail to kick-start the economy, then it should be public budgets that do so. How? By changing the rules that drastically limit deficits in times of crisis, by creating public investment programs and by obliging central banks to buy debt directly from states to avoid a dependence on financial markets. What is the risk of these policies? Inflation, according to naysayers, even though that is the goal. However, whatever is done about it will already come too late, all thanks to the ideological dogmatism that has controlled politics and the economy in recent years.