The Case Against QE: "Zombie Banks, Companies, Households, And Governments"
In a quiet corner of Davos this week, Davide Serra (hedge fund manager) and Nouriel Roubini (doom-monger) laid out to the great and good attending just exactly what their puppet central-banking transmission channels were doing to our world. As The Telegraph reports, "Money printing is theft from our children and may merely be storing up problems for an even bigger crisis." QE has led to gross mis-allocation of capital, the two gentlemen go on to note, adding that they comprehend the reasoning why Bernanke's Put has replaced Greenspan's but add that in doing this money-printing-by-another-name, they have "made it difficult for bond vigilantes to do their job - force fiscal reform." QE just buys time - but the time must be used wisely. Roubini warned that central bankers need to think about turning off the cheap money tap or risk creating another, possibly even worse, bubble.
Via The Telegraph,
Speaking at the World Economic Forum in Davos, Davide Serra, founder of leading hedge fund Algebris, and Nouriel Roubini, the head of Roubini Economics known as Dr Doom for predicting the financial crisis, set out the case against those who think quantitative easing (QE) and low rates are benign policy tools.
“When governments borrow, they are taking money from our children. QE is the same – we are lowering returns for future generations. QE creates an inter-generational dilemma,” Mr Serra said.
Mr Roubini warned that central bankers need to think about turning off the cheap money tap or risk creating another, possibly even worse, bubble.
He argued that policymakers have encouraged markets and individuals to take on crippling levels of debt by leaving asset bubbles unchecked in a boom and coming to borrowers’ rescue in a crisis.
"Ten years ago we had the Greenspan put, now we have the Bernanke put. What are the long term economic consequences?" he asked.
He said loose monetary policy is creating a system biased to creating bubbles, "that's why we've been moving to more unconventional territories" in policy responses - from low rates to QE to credit easing.
"Central bankers have affected the behaviour of the private sector. They have to think about that," he said. "As you do a slow exit out of QE you may create another bubble and make another crisis.
“At some point, the consequence of postponing deleveraging is that you end up with zombie banks, zombie companies, zombie households, and zombie governments.”
The warnings came after the Bank of Japan caved into political pressure and pledged to buy government debt in potentially unlimited quantities in an attempt to stimulate growth.
The move prompted accusations that Japan had launched a fresh attempt to debase its currency and improve the competitiveness of its exports.
As an investor, Mr Serra said QE had led to a “misallocation of capital”, echoing concerns voiced by the Bank of England and others that QE might be distorting markets and creating new risks.
Both Mr Roubini and Mr Serra agreed that QE had been essential at the start of the crisis but, by protecting governments from attacks in the bond markets, it was now making it “difficult for the bond vigilantes to do their job – force fiscal reform”.
For Mr Serra, the time to stop increasing QE had come. "QE just buys time. When you buy time, you must use it. I'd follow the ECB [European Central Bank] model and not the Bank of Japan and US Federal Reserve model,” he said.
Defending QE in the panel debate, Adam Posen, director of the Peterson Institute for International Economics and a former UK rate-setter, argued that QE was merely an extension of normal monetary policy and has been used throughout history. The decision on whether to use the tool depended on the balance of growth and inflation, he added.
“Will the economy in two to three years be below where it should be, and is there an inflation risk? That’s the question. And it’s the same if you’re using interest rates or QE.”
He added that the current problems regarding the effectiveness of QE were less to do with monetary policy and more to do with investor behaviour.
“The same investors who blamed the crisis on central banks keeping rates low are now saying low rates are reducing risk appetite,” he pointed out. “We should shift the focus to investor behaviour.”