Sir, Concentration on “will he/won’t he?” — he being Mario Draghi — obscures the fact that quantitative easing was originally developed to save the banking system from implosion. The combination of QE, liquidity and disposal of potentially valueless assets ensured that banks survived. As worries extended to sovereign debt, QE protected there too.
But when QE metamorphosed, first into a mechanism for protecting the risk takers against the consequences of their errors, then into a presumed substitute for the boost to demand that politicians found it ideologically or practically impossible to pursue through national budgets, it became a monster that now has markets and regulators alike transfixed.
We have ample evidence that money poured into banks does not magically flow into investment or consumption. The Japanese lesson. That low interest rates boost financial and property asset prices but do nothing to encourage buyers of property to spend rather than save. The London lesson. That huge purchases of bonds and dramatic spread compression do not encourage bankers to avoid the risk that the metamorphosed policy reverses, quite the opposite — they dance on. The New York lesson. Yet we persist.
I’d suggest that global uncertainty persists because policy flatters wild risk-takers over savers, exacerbates the divide between the haves and the have nots, rewards the rentier, while the consumer will not consume and the business leader will not invest. This policy merely buys time.
Its time is up. The banking system was saved and with new capital will remain saved. But the price of excess leverage, of tilting the roulette wheel towards egregious gamblers, has not been paid. We should not protect property prices so high that only the rich can afford them, or drive yields to such miserly levels that only the very rich are secure, and especially we should not venerate price — a mechanism for communicating economic value — as superior to those businesses, workers and consumers whose energies drive the real economy. Schumpeterian destruction is not the only capitalist way. But praying that QE will reverse shortfalls in demand, just because it saved bank liquidity and solvency, means we simply narcotise ourselves for longer with low interest rates. Hong Kong learnt those lessons many times. Bite the bullet. Reprice the assets. Write off the unpayable debt. Smite the unwary. Start again with a new confidence that there is an upside.
Director, Asian Capital Partners,