Thursday, Dec 18, 2008
Note Who Wrote this article:
Anatole Kaletsky is a Bilderberger, formerly Times Economics Editor and is now an Associate Editor of The Times. He has won many awards for his financial and political journalism. He worked for 12 years on the Financial Times.
At long last, the world’s economic leaders are swinging into action. The US Federal Reserve could have done what it did on Tuesday night – slashing US interest rates to absolute zero and announcing that it would print money without limit – two months ago, when the collapse of Fannie Mae and Lehman Brothers turned a localised financial problem into a life-threatening convulsion threatening the entire global economy. But better later than never.
The world’s most important economic policymakers now have the bit between their teeth and their counterparts in Britain, Japan, Switzerland and the eurozone will find it impossible not to follow.
Politicians all over the world must now stop talking about hard choices – and start taking soft options. That may sound sardonic, but it isn’t supposed to be. The political rhetoric of “hard choices” may sound more appropriate than “soft options”, but a medical analogy makes it clear why pampering, not punishment, is what the world economy now requires. To recuperate from the post-Lehman heart attack, bankers and borrowers needs cosseting in the soft eiderdown of zero interest rates, while consumers and businesses need the emotional reassurance of tax cuts and government guarantees.
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Without such tender care from central bankers and politicians, the year ahead could easily bring the death-throes of the globalised capitalist economic system. By cutting interest rates from 1 per cent to zero, the Fed opened the door to a completely new world of possibilities where many traditional rules vanish or go into reverse – a sort of economic Wonderland in which money can be distributed free to citizens and where governments can spend and borrow at will, without any increase in borrowing costs.
Now that the Fed has blazed the trail, other central banks are likely to follow. The sooner they do this – for the Bank of England it should be at its January monetary policy committee meeting – the greater the chances of averting a depression.
Specifically, the Fed’s decision to impose zero interest rates was accompanied by a commitment to “unconventional” monetary measures. In layman’s terms this means a promise to print and distribute money – and to keep printing it – until the US economy has pulled out of its recessionary spiral.
This is something that no central bank in any advanced economy has before promised so explicitly. But what, in practice, does it mean? In a modern economy there are three ways to “print money”.
The first, most cautious, approach is for the Fed to buy safe assets, such as government bonds, mortgages, student loans and other guaranteed debts that are now owned by private banks, investment institutions or individuals. The Fed will pay for them simply by making electronic transfers into the bank accounts of the people or institutions selling. For every $1 million worth of assets bought, the Fed will transfer $1 million of new money into private bank accounts. This “money” will come literally out of nowhere. It will simply be an electronic blip on the Fed’s computer. Because electronic deposits at the Fed are the ultimate form of legal tender in the US system, the result will be that the US economy has $1 million more money.
This article was posted: Thursday, December 18, 2008 at 12:02 pm