Forward guidance helps to fuel the debt problem

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From Mr David Boorer.

Sir, Gillian Tett (“Insane financial system lives on post-Lehman”, Insight, Markets & Investing, September 13) should perhaps have mentioned a seventh “uneasy truth” about the post-Lehman world: there is no will to resolve the debt problem from the borrower’s point of view.

Excessive debt which, by definition, cannot be repaid according to its terms can only be written off, forgiven or extended indefinitely by more generous terms. Central bankers, naturally enough, felt obliged to ease the terms with low interest rate regimes. The dangers that creates – more asset bubbles on top of the previous ones, inadequate saving and pensions for those retiring in two or three decades’ time – have been much discussed.

Would it not have been much the better course of action for policy makers to have, instead, sought an ordered programme of debt forgiveness accompanied by a managed (as far as possible) reduction in asset prices?

For the UK at least that would have restored household debt to affordable levels, would have reduced house prices without creating undue negative equity and, possibly most importantly, enabled new debt to be provided to solvent borrowers who were, once again, able to see assets and opportunities that provided a positive cash flow in real terms.

From that moment on, of course, we would also need to forbid central bankers from giving any “forward guidance” at all. There is nothing that concentrates the speculative mind like uncertainty and forward guidance (in its various guises over several decades) has contributed massively to the credit build-up by removing one of the most important disciplines of good credit management.

But now, as Ms Tett says, our exit from quantitative easing is down an unknown road.

The policy debate is rather like that between people stuck in a lift when the emergency button doesn’t work and the building is empty. Uneasy indeed.

David Boorer, Llandovery, Carmarthenshire, UK

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