From the body that brought us Adam Posen, four policy recommendations:
• The Federal Reserve should purchase an additional $2 trillion of longer-term debt securities, with an average maturity of around 7 years.
• The European Central Bank should lower its main refinancing rate to 50 basis points, continue to extend unlimited 12-month credit to the banking system at this rate, and purchase €1 trillion of longer-term debt securities.
• The Bank of Japan should state more clearly its intention to return inflation to at least 1 percent over the next two years, purchase an additional ¥100 trillion of longer-term debt securities with an average maturity of around 7 years, and commit to a further ¥100 trillion in such purchases in 2011 if core inflation over the next 12 months remains negative.
• The Bank of England should purchase an additional £200 billion of longer term sterling bonds or an equivalent amount of longer-term foreign-currency bonds with the interest and principal hedged using currency swaps.
Yep, you read that correctly. Joseph Gagnon of the Peterson Institute reckons that what the world needs is a whole lot more quantitative easing.
He points out that just about all recent forecasts — be they from the private sector, central banks or international agencies — point to years of lacklustre growth, high unemployment and little or no inflation. In short, talk of when a tightening phase might begin is misguided; the current policy stance is actually too tight.
In total, Gagnon reckons central banks in the four main economies need to buy an additional $6,000bn of longer-term debt. A third of that applied to the US should boost GDP growth by an additional 3 per cent by 2011, he says, while the Eurozone and Japan require even more aggressive action.
But won’t a fresh hosing of QE simply create asset bubbles from Wall St to Shanghai? Gagnon seems remarkably nonchalant about that possibility:
Concern about asset price bubbles in the main developed economies is not warranted in the near term. As Mishkin (2009) reminds us, the harm caused by bursting bubbles arises almost entirely from excessive leverage used to finance asset purchases. At present, leverage is falling as banks continue to tighten credit standards and terms. Should unsafe lending practices return, financial supervisors need to aggressively shut them down. (Posen (2009) discusses systematic policies to counter lending booms and busts.) Equity prices have risen, but from excessively low levels, and price‐earnings ratios remain within historical ranges. It is important to recognize that current and expected future low interest rates are a fundamental element of asset valuation that supports high asset prices. A bubble occurs only when asset prices significantly exceed their fundamental value.
Read Gagnon’s full paper here.
(H/T Alea)
Related links:
Can I Nominate Joe Gagnon to Replace Bernanke? – Brad De Long
“The Case for $6 Trillion More Monetary Stimulus” – Mark Thoma