The Monty Python and BIS sadomonetarism

Since the onset of the Great Recession, in 2007, the traditional guardian of stability, the IMF, has evolved more and more towards a pragmatic, non-ideological approach. Some have erroneously called it Keynesian, but the IMF is far from it. Actually, it could even be argued what Keynesianism is: the great British economist applied pragmatism to his personal and intellectual life, and those who identify him with social-democratic positions tend to forget that, at his death, Keynes thought that government should not be more than a quarter of a country’s total GDP (this is, half of what it is today in the developed world).

On the other side of the spectrum, there is the Bank of International Settlements (BIS), which is led, paradoxically, by a former top-ranking IMF officer: Jaime Caruana.

While the IMF has been advocating pragmatic policies, the BIS has shown no willingness to accept reality. Its last Annual Report, published on Tuesday, is a new example of this: the BIS asks central banks to be ready to implement preemptive interest rates hikes to prick the asset bubbles that are starting to appear.

Fortunately, there are reality-based policy makers who immediately rebutted Mr. Caruana’s inquisitorial views. The most relevant is the chairwoman of the Federal Serve, Janet Yellen, who stated on Wednesday that monetary policy is not the right tool to ensure the financial sector’s stability. That same day, Bank of England’s chief economist Andy Haldane also made it clear that monetary policy is only the last line of defense against bubbles.

There are three main arguments against the BIS folly:

1) The Macro Argument. Inflation is well under the national authorities’ target in the US and Japan, and at a historic low in the UK, while the EMU is even at risk of deflation. Economic growth is clearly subpar in all those four areas. Rising interest rates would risk plunging all those four economies into a recession and possibly, into a deflationary spiral. And that, in turn, would be very damaging, let’s not forget, for banks. In other words: the BIS is recommending a suicidal policy change, pure and simple;

2) The Moral Argument. Interest rates affect, by definition, the whole economy, so they should not be used to stabilize just a part of it, no matter how important it is, such as the financial industry. It should be akin to socializing–once again–the costs of maintaining the financial industry healthy;
3) The Bureaucratic Argument. Macroprudential supervision is progressing, and that is –or should be– the right tool to stabilize financial industry at a moment of growing supervision and regulation. Monetary authorities should not, and cannot, take the roles of financial supervisors on their shoulders. The BIS sadomonetarism does not seem to be the right tool to steer the global economy. Instead, IMF’s Keynesian pragmatism seems to be a more practical strategy.

About the Author

Pablo Pardo
Pablo Pardo is Washington DC correspondent of El Mundo. Journalist especialized in International Economics and Politics.

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