By Steven K. Beckner
JACKSON HOLE, Wyoming (MNI) – Adam Posen, an external member of the
Bank of England’s Monetary Policy Council, said Thursday the European
Central Bank should “absolutely” buy the sovereign debt of countries
like Italy and Spain and that it should formally “cap” the yields on
their bonds.
The soon-to-retire Posen, talking to reporters ahead of the Kansas
City Federal Reserve Bank’s annual symposium, argued the ECB could
effectively cap yields and could probably even turn a profit on the
transactions by reselling the bonds after they rise in price and their
yields fall.
Posen, will soon leave the BOE to take over the helm of the
Peterson Institute for International Economics in Washington, also urged
the Fed to do more quantitative easing, saying there is no reason for it
not to do so given the lack of inflation, the high level of unemployment
and other circumstances.
He said the Fed is “interested” in the Bank of England’s “Funding
for Lending Scheme (FLS),” but said the U.S. and British financial
situations are “not a direct parallel,” suggesting the program may not
be easily transferable to the U.S. economy.
Fed Chair Ben Bernanke, among others, has expressed interest in the
FLS. Minutes of the July 31-Aug. 1 meeting of the policymaking Federal
Open Market Committee say that, in light of the BOE scheme, “a couple of
participants expressed interest in exploring possible programs aimed at
encouraging bank lending to households and firms, although the
importance of institutional differences between the two countries was
noted.”
Under its program, the BOE seeks to incentivize banks to make more
loans by reducing their funding costs. For a 25 basis point annual fee,
the BOE lends banks UK Treasury bills for up to four years, which the
banks can then use as collateral to borrow at low rates.
ECB President Mario Draghi, on short notice, decided not to come to
Jackson Hole as scheduled, as the ECB chief typically does, and Posen
called that “untrammeled good news … It means (he and other European
authorities) really are working on operational things … to make
something happen.”
Asked if the ECB should buy southern European sovereign debt and
cap yields to restrain government borrowing costs, Posen replied,
“absolutely.” The ECB “should be intervening in the long bond markets
of these countries.”
Speaking of Spain and Italy, Posen said it is “difficult if not
impossible to justify their bond rates being as high as they are …
That’s something that central banks that can print their own money can
deal with.”
If yields are out of line with fundamentals, the ECB can and should
be able to reduce bond premia by purchases.
Posen recalled that at the time of the Asian financial crisis in
the late 1990s, the Hong Kong Monetary Authority bought depressed stocks
and was later able to resell them for “a huge profit.” He said the ECB
should be able to do the same thing with bonds if it knocked yields
down by 150 basis points.
The Fed should also do more asset purchases he said, adding that if
the effectiveness of bond purchases is reduced, “then that argues you do
twice as much but you still pursue the mandate you’ve got.”
The U.S. has “no inflation, unemployment is too high … even when
you allow for a rise in structural unemployment, there’s no crowding
out in bond markets, the dollar has been perfectly strong,”, so there
is no reason for the Fed not to do more quantitative easing Posen said.
If Fed easing has not induced sufficient growth and employment yet,
then “you’ve got to keep going until you get to that sufficient ease,”
he argued.
As for the Fed using its discount window along BOE lines, he said
he knows Fed officials are “interested,” but he cautioned the two
countries situations are “not a direct parallel,” because the U.S. has
far more banks than the UK as well as other sources of capital. And U.S.
credit problems are much more mortgage oriented than in the UK.
Even in the case of the BOE scheme, he said “it’s premature to
judge anything yet as to its effectiveness.
Posen hailed Chicago Federal Reserve Bank President Charles Evans’
proposal to keep the federal funds rate near zero until unemployment
falls below 7% so long as inflation does not rise above 3% and said the
Fed should adopt something like it.
He also said the Fed needs to make more clear that it will keep
rates very low for a long period of time and back its commitment with
action. “It’s better to say and do than just say,” he said.
** MNI **
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