A short Letter to the Editor, but worth reading. He clearly explains the policy failure since the global crisis and the reasons for the current problems in financial markets in developed and developing countries. He says:
The adage that, in the absence of the prospect of growing demand, cheap money amounts to “pushing on a string” has been once again confirmed in advanced economies by the slowest recovery from any modern recession. Instead of funding real investment, monetary expansion has resulted in a boom in asset prices — not just in real estate and equity markets, but in the flow of funds into emerging market corporate bonds in the search for higher return. All these asset markets are extremely unstable, as is now all too evident. And, as has been once again demonstrated in the last 7 years, financial instability leads to substantial real economic loss.
Yet in the face of evident policy failure, and of severe asset market distortions that can only lead to further financial instability, the response seems to be “more of the same”, or even, in the case of negative interest rates, “very much more of the same”. There was a significant fiscal expansion in the US in 2009 that had a clear positive impact. But the federal government lost its nerve and reined back on the expansion just as it was gathering pace. The quiet abandonment of severe austerity by the UK government in 2012 at least enabled something of a recovery, albeit fuelled by growing household debt. Fiscal policy works.
Given that the cost of funds to most governments is today negative in real terms (and sometimes in money terms too) it is difficult to understand the failure to initiate a major expansion of investment in infrastructure and the other major components of “supply-side” strength. This failure is resulting not just in a loss of output today, but a long-term loss of competitive productive capacity (a particularly severe problem for the UK). Fiscal policy can provide the pull on the string required to validate the monetary push.
Read the full letter here (subscription required). Pushing on a string as an explanation for the inefficiency of monetary policy in a crisis was a term popularized by Marriner Eccles, by the way.