Tags: Roach | QE | ECB | Fed

Yale's Roach: Global 'Monetary Policy Has Lost Discipline and Coherence'

By    |   Tuesday, 27 January 2015 09:11 AM

Many economists have expressed enthusiasm about the European Central Bank (ECB)'s 1.1 trillion euro quantitative easing (QE) program announced last week. Stephen Roach, a senior lecturer at Yale's School of Management, wasn't one of them.

"In the QE era, monetary policy has lost any semblance of discipline and coherence," Roach, former chairman of Morgan Stanley Asia and the firm's chief economist, writes in an article for Project Syndicate.

"As [ECB President Mario] Draghi attempts to deliver on his commitment [to protect the euro], the limits of his promise — like comparable assurances by the Fed and the Bank of Japan — could become glaringly apparent. Like lemmings at the cliff’s edge, central banks seem steeped in denial of the risks they face," he notes.

"QE's impact hinges on the 'three Ts' of monetary policy: transmission (the channels by which monetary policy affects the real economy); traction (the responsiveness of economies to policy actions); and time consistency (the unwavering credibility of the authorities’ promise to reach specified targets like full employment and price stability)," Roach adds.

"Notwithstanding financial markets' celebration of QE, . . . an analysis based on the three Ts should give the ECB pause."

The Federal Reserve deployed three rounds of QE, finishing last October, and the BOJ is in the midst of a huge QE program of its own.

"The real sticking point for QE relates to traction. The U.S., where consumption accounts for the bulk of the shortfall in the post-crisis recovery, is a case in point," Roach writes.

"In an environment of excess debt and inadequate savings, wealth effects have done very little to ameliorate the balance-sheet recession that clobbered U.S. households when the property and credit bubbles burst."

Legendary investor George Soros offered some skepticism about the ECB's QE too, though he's not as critical as Roach.

While he called the program a "very powerful set of measures" at the World Economic Forum in Davos, Switzerland, last week, Soros also said it could "reinforce inequality" in the eurozone, BBC News reports.

That reinforcement would presumably come as QE boosts financial markets as much as the economy. The wealthy, of course, hold many more financial assets than the poor and middle class.

"Excessive reliance on monetary policy tends to enrich the owners of property, and at the same time will not relieve the downward pressure on wages," Soros said.

On the plus side, he said that if the ECB succeeds in boosting economic growth, that will make it easier for countries such as France to implement restructuring measures to increase economic efficiency.

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Many economists have expressed enthusiasm about the European Central Bank (ECB)'s 1.1 trillion euro quantitative easing (QE) program announced last week. Stephen Roach, a senior lecturer at Yale's School of Management, wasn't one of them.
Roach, QE, ECB, Fed
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2015-11-27
Tuesday, 27 January 2015 09:11 AM
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