QE policies need a rethink after failure to achieve goals

IT'S what Oscar Wilde once referred to as the kind of relationship that "dare not speak its name" - although, in this case, it has nothing to do with sexual proclivities but rather is a way of describing the ever closer ties between the world's major central banks and finance ministries.

The very suggestion of central banks "monetising" public debt by directly underwriting government bonds is wont to elicit (at the very least) a look of stern condemnation; the censorious reaction would be that it's "just not done", and shouldn't even be thought of. Yet effective monetisation is happening on a grand scale in Japan and the eurozone. So far, only the US Federal Reserve is beginning to wean itself off the habit of buying up government debt (if not exactly at the time of issue, then as near to it as makes no difference).

The trouble is that - because they are forced by conventional economic wisdom to pretend that they are not engaging in what's supposedly a vice, and to practise it by the "back door" - central banks have little say in what happens to their money; they acquire assets over which they have no control. Central banks buy government bonds from the market (that is, from commercial banks and other financial institutions) so that those institutions can on-lend money to industry and business or to consumers - who, hopefully, will then invest and consume more, with consequent benefit to the economy.

In the case of the Bank of Japan (BOJ), however, this has not happened on the scale envisaged. Instead, banks have used the proceeds from their bond sales to the BOJ to create interest-bearing deposits at the central bank - forcing the BOJ to impose negative rates in an effort to drive the money into circulation. If central banks were permitted instead to buy newly issued bonds directly from finance ministries, they might opt to purchase loan assets dedicated to, say, infrastructure or other construction projects. Or they might purchase "health" or "education" bonds.

This could work better than hoping that investors will invest or that consumers will consume, simply by virtue of having the financial wherewithal to do so made available. If QE (quantitative easing) policies have proven anything in Japan's case, it's that you can lead a horse to water but you can't make it drink.

Horrified opponents of central bank monetisation of debt will no doubt cry: what about fiscal discipline and the danger of hyper-inflation if finance ministries can engage in reckless spending of money supplied by compliant central banks? But how much control do central banks have now anyway over the liquidity they indirectly create and which ends up largely in asset inflation-creating purchases of portfolio investments such as stocks and bonds, or in investments in real estate at inflated prices?

Besides, runaway inflation hardly appears to be Public Enemy No 1 now, after a long period of disinflation and deflation - when central banks are struggling, often in vain, to meet inflation targets, and when excessive production capacity and oversupply of goods are rampant. There appears to be a dawning realisation now that it's necessary to rethink the issue of central bank monetisation of government debt.

The International Monetary Fund, the World Bank and the Organisation for Economic Co-operation and Development are among those talking of the need for increased fiscal stimulus to pull the global economy out of its long period of slow growth - and for central banks and finance ministries to work together in this regard. It is surely time for outdated taboos to give way to more enlightened analysis.