Why should we continue to impose ultra-orthodox budget policies while the world economy operates in the craziest monetary heterodoxy? 


Since the financial crisis of 2008-9 following the collapse of Lehman Brothers, Central Banks have been adapting to the new financial situation by adopting new strategies. After decreasing key interest rates, reducing them to near 0% (a situation unprecedented in the history of post war capitalism) they have continued to adopt policies that economic commentators, and even the central banks themselves politely refer to as being unconventional. The truth is that such strategies are totally unorthodox. No macro-economics textbook nor economic theorist has ever advocated that central banks should compromise their viability by the purchase of such unstable financial ‘assets’ as American mortgages (to save lending institutions such as Fannie Mae and Freddy Mac) and to a lesser extent the purchase of public and private debt. Not only would such practices have been unimaginable to classical economists, but the very possibility of such policies being adopted would have resulted in dire warnings from them of inevitable disastrous consequences.

Pragmatism, especially the American pragmatism that inspired monetary policy immediately after the crash of Lehmann Brothers was a necessary and even welcome response to an unprecedented situation. In 2008 even Ben Bernanke, president of the Central Bank of America, famous for his directorial orthodoxy, and a specialist in the financial crisis of the 1930s (the length and severity of which he blamed on inadequate and over restrictive monetary policy) did not hesitate to increase the assets available to banking and financial institutions. However, it is doubtful that even he would have imagined that such practices would still be continuing in the world of international finance today. Such unorthodox practices being just too hazardous !

An unbridgeable chasm has now come to exist between the advocates of unorthodox monetary practices (particularly financial traders faced by continual recent market turbulence) and those with a more orthodox understanding of the economic and fiscal procedures. It is now commonplace to witness private shareholders demanding that central banks, which are independent public institutions, do nothing that might endanger the value of the financial assets with their personal interests under threats, these actors advocate increased competition, salary reductions and structural reform. They thus combine “unorthodox” monetary policies with “orthodox” economic policies. When the Greeks or any others contest their rigorous economic liberalism they are told condescendingly that they have made ‘insufficient effort’, or that they ‘understand little of the functioning of a liberal economy’. They are told in most undemocratic fashion that ‘you may have elected Syrisa but it’s the financial reality of the troika that really governs here’.

When all is said and done, what lesson might be drawn from the employment of unconventional financial procedures ? They were originally intended to foster growth by stimulating investment, but little if any such investment has been observed. In fact, profits have been distributed to shareholders, either via dividend payouts or via share repurchases. What is occurring right under our noses is the fostering of a capitalism of ‘share holder value’ (the creation of value to the shareholder), a capitalism without specific purpose, to which current financial institutions and current monetary policy seem devoted, rather than to a more conventional capitalism linked to industrial enterprise. In fact, the present unconventional strategies will undoubtedly result in  deflation due to the lowering in price of industrial products in the real economy, while at the same time financial and real estate prices are forming a bubble, encouraging reckless speculation (in the hope of inordinate renumeration) by those employed in financial institutions.

Should we not consider a different approach ? If, as seems likely, we must now act to prevent deflation, why should we not adopt an ‘offensive’ budgetary strategy, one whereby direct spending power is facilitated by the monetary authorities (“helicopter money”). This world lighten the burden of public debt (which will be necessary sooner or later as the IMF admitted this summer during the third phase of negotiations for aiding Greece) ? At the very least, doing so would have the merit of putting the needs of real human beings before the concerns of the nebulous world of finance.

“An unworkable dangerous pice of populism” will be the criticism levelled against such a proposal. But could it the results of such a measure be any worse than those of eight years of unconventional monetary strategy designed to protect the financial world from suffering any loss ? In our view we must end the practice of discouraging central bankers from doing anything capable of misinterpretation by financial markets. Even if the argument for not disturbing the markets seems difficult to counter it should be attempted. The financiers argue that should another financial crisis occur it will inevitably have dramatic consequences on the real economy and therefore for citizens and that consequently, they should be protected and left unhindered to get on with their money generating schemes. In truth, this argument is nothing but a form of blackmail aimed at the poor, the unemployed and the excluded, all those who presently suffer and actively demonstrate against austerity.

I will leave Jans Weidman, the governor of the German central bank, to characterise the unorthodox monetary strategies of the last eight years. In September 2012 he compared Mario Draghi and Ben Bernanke to Mephistopheles – the Devil – when he whispered into the ear of the Emperor in the second part of Goethe’s Faust…..

‘Which strategy is the most dangerous for our future’ ?

Bernard Laurent

As a professor, I teach macroeconomic issues, business ethics, European economic integration and economic environment of the firm. My research mainly focuses on the “Social Doctrine of the Catholic Church”.
Since 2013, I am a Visiting Fellow at the Von Hügel Institute (St Edmund’s College – University of Cambridge). I am also a shire advisor at the council CESER Auvergne-Rhône-Alpes (Conseil Economique, Social et Environnement Régional).Since 2004, I am a scientific advisor to the Board of Directors of the IRES (Institut de Recherches Economiques et Sociales).

More information on Bernard Laurent:
• His CV online