Monday, June 11, 2012
Making monetary policy more effective
Posted by David Smith at 07:00 PM
Category: Thoughts and responses

Adam Posen, who to be fair has been there before, is continuing to push for monetary policy to be made more effective, notably through the purchase of private sector assets. I agree entirely. It is to be hoped that the pressure for such action does not disappear with Posen's departure from the monetary policy committee.

This is what he said: "I believe that further asset purchases by central banks can improve the economic situation we are now in. I believe that this is particularly true because a major source of our difficulties is an excessive perception of and aversion to risk on the part of investors, even though some rise in that perception and aversion were justified after the boom years. That rise which we see, and the resultant cash hoarding by businesses and portfolio investors, are excessive because some credit problems really are due to illiquidity and to financial market dysfunction rather than to insolvency and indebtedness. We are at risk of the reluctance to invest becoming a self-fulfilling prophecy, as opposed to investment leading us into recovery as in normal
situations. Additional expansionary monetary policy should be effective in breaking this cycle, and must be pursued to meet central banks’ mandated goals.

"I propose that further asset purchases by central banks should take the form of private sector securities for the time being. This will allow more direct targeting of financial sector dysfunctions, and greater impact on liquidity preferring investors’ portfolios, thereby leading to greater impacts on confidence and on the real economy than a similar unit of QE on government bonds. Obviously, not all private sector assets should be eligible for central bank purchases. Central banks should choose those assets which provide the best combination of market depth when functional, importance to the economy, and financial dislocation at present. Securitized bundles of bank loans are in many ways the best kind of private asset to purchase, be they for SME lending in the UK or for mortgages in the US. Where securitized markets of sufficient depth for such assets do not yet exist, as in the UK for SME loans, the central bank should engage in offers to purchase which help make the market for such assets."

The speech is here.