Bigger is betterBelieving there to be smarter alternatives to the sledgehammer approach of monetary policy when it comes to guarding against asset-price bubbles,
The Economist argued in favour of the introduction of targeted rules to reduce instability across the financial system. “These are known as macroprudential regulations (in contrast to microprudential regulations, which protect individual consumers or firms),” the newspaper explained.
By way of example, it cites the 2010 Basel III accord, the higher loan-to-value ratios on mortgage loans introduced last year by the Reserve Bank of New Zealand, and the
Bank of England’s new restrictions on the size of mortgages relative to borrowers’ income.
500%
The percentage rise in the Fed’s monetary base since the 2008 financial crisis
However,
The Economist did note that the overall efficiency of such tools is still uncertain. “Although bubbles look obvious with hindsight, predicting them is tricky. Expecting regulators to identify bubbles in advance – and then design rules to deflate them – may be optimistic. But if countries are to avoid repeating past mistakes, macroprudential regulations may need to become a permanent part of how they manage their economies.”
The Economist blog
Who really holds the reins?
Noting the concern voiced by the Bank for International Settlements (BIS) over the continued easy monetary policy of central banks, Mark Harrison, author of
The Empowered Investor, and Director of Publications at the CFA Institute, questioned whether the Federal Reserve actually controls the interest rates that have been buoying markets.
“In a new study, Nobel Laureate Eugene Fama … considered the degree of control that the Fed exerts on interest rates, both short and long term, finding that although short-term control of rates is under the Fed’s thumb, results for longer-term rates are less conclusive.
“Simply put, the (ever-efficient) market, rather than the Fed, is in the driver’s seat for long-term rate setting. Understanding the Fed’s power versus market forces could better inform trading decisions and improve forecasting models.”
Having considered a few other studies, Harrison concluded his blog by noting: “Perhaps imagination and a return to investing using old-fashioned ratios can trump malfunctioning investment models for a while.”
CFA Institute blog Politics rulesAnthony Mirhaydari of
The Fiscal Times wrote that the choice between inflating assets to create jobs and adhering to sound monetary principles to prevent market bubbles is a dilemma that stretches back hundreds of years.
He noted that the Fed’s monetary base has gone from around $800bn before the financial crisis to nearly $4tn, while short-term interest rates have been held at near 0% for six years.
The easy-money sceptics, said Mirhaydari, fear the US central bank is “inflating an asset price bubble, much larger than anything seen before”, while the Fed apologists, “excited by record highs in the stock market and an improving job market … argue there’s little reason to pull away the punch bowl now.”
With the International Monetary Fund speaking up in favour of more monetary stimulus, and the BIS warning that central banks have gone too far, Mirhaydari concluded that politics is at the heart of matters.
“The Fed is by nature a political institution. It gets no bonus points for casting ahead and trying to cut asset-price bubbles down when many believe the rises are justifiable by the fundamentals and are fuelling job market gains.”
The Fiscal Times story
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