(Bloomberg Opinion) -- BlackRock Inc., the world’s largest money manager, has a who’s who of former central bankers under its umbrella. And they’ve come out with a bold plan for addressing what appears to be the end of the line for conventional monetary policy.
Philipp Hildebrand, the former Swiss National Bank president, is now vice chairman at BlackRock, where he oversees the BlackRock Investment Institute. Within the institute, Stanley Fischer, the former Federal Reserve vice chairman and former governor of the Bank of Israel, is a senior adviser, and Jean Boivin, the former deputy governor of the Bank of Canada, is the global head of research. Along with Elga Bartsch, the head of macro research, they published a report Thursday ahead of the Kansas City Fed’s Economic Policy Symposium in Jackson Hole, Wyoming, that advocates for more explicit coordination between central banks and governments when economies are in a recession so that monetary and fiscal policy can better work in synergy.
They make clear from the onset that so-called helicopter money — that is, having central banks just blanket the citizenry with cash in the hopes that it will encourage spending and investment — isn’t a realistic option. But their suggestion for a “Standing Emergency Fiscal Facility” starts to head in that direction.
Here’s the general outline of their proposal:
• The central bank would activate the SEFF when the interest rate channel is tapped out and a significant inflation miss is expected over the policy horizon.• The central bank would determine the size of the SEFF based on its estimates of what is needed to get the medium-term trend price level back to target and would determine ex ante the exit point. Monetary policy would operate similar to yield curve control, holding yields at zero while fiscal spending ramps up. The central bank would calibrate the size of the SEFF based on what is needed to achieve its target.• Independent experts would decide how best to deploy the funds to both maximize impact and meet strategic investment objectives set by the government.
This sounds perfectly fine in theory. This sort of facility would certainly allow monetary and fiscal policy to move more quickly and nimbly than if they were purely separate from each other. And it’s becoming clear to all involved in financial markets that simply tinkering with interest rates at these ultra-low levels doesn’t do much to bolster the real economy. The risk is a persistent “liquidity trap,” given that monetary policy is constrained by an effective lower bound.
But, as you might expect from a group of former central bankers, it relies heavily on the assumption that a group of experts knows how to fine-tune a complex economy.
Notice that the size of the emergency fund would be “based on its estimates of what is needed to get the medium-term trend price level back to target.” It’s an open question whether members of the Fed, or the European Central Bank, or the Bank of Japan or others have a feel for what it takes to jump-start inflation. The ECB has tried persistently negative interest rates. The BOJ has tried buying ETFs. You can understand the rationale for taking these steps, given the known tools of monetary policy, but I’m not sure anyone would say they’ve been successful. Granted, they’ve never had a sort of fiscal stimulus at their disposal, but their track record thus far is dubious.
Then you have the fact that “independent experts would decide how best to deploy the funds.” Again, it depends on a small group to effectively provide the fiscal boost needed to get the economy on track. I’m not opposed to ramping up fiscal spending on infrastructure or other beneficial projects — in fact I recently advocated for it — but it’s hard to see how politicians will accept standing by and letting this play out without trying to influence the process in a way that benefits their constituents. Policy independence has always been a two-way street.
Speaking of the process, the authors go so far as to describe how this facility could work in various countries. In the U.S., they say, “Congress could create a special Treasury account at the Fed and authorize FOMC to fill the account up to a pre-set limit.” It’s similar in Japan, where the “BOJ could credit a government account at the central bank.” Again, not helicopter money — but also not all that far from it. Hildebrand said in a Bloomberg Television interview that the goal is to get money directly into the pockets of consumers and corporations.
Targeted fiscal policy is the great unknown and seems to be gaining traction as something of a cure-all for the failures of monetary policy to sustainably lift growth after the financial crisis. As with anything purely theoretical, it’s anyone’s guess whether even the most sensible plans will live up to the hype.
Either way, BlackRock’s former central bankers are convinced that monetary policy as they knew it will be largely useless in the next recession. Especially considering that the theme of next week’s conference in Jackson Hole is “Challenges for Monetary Policy,” investors ought to treat this proposal for “going direct” with coordinated fiscal policy as a rough draft of what the future might hold.
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Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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