QE & Moral Hazard

The usual moral hazard arguments against QE – akin to the arguments about the “Greenspan put” – are well known and neatly summarised in this Reuters analysis, “Fed’s QE2: Miracle Cure or Moral Hazard?“, May 2011.

However, there is another angle that is rightly getting far more attention these days – the moral hazard imparted by easy monetary policy to profligate governments. For an interesting overview as to how boundaries between monetary and fiscal policy are getting blurred – much to the disgust of die-hard Bundesbankers now residing in the ECB – have a look at the Economist’s latest briefing, “Emergency Manoeuvres“, 13 August 2011. The conclusion makes grim reading,

“Although the [ECB] central bank’s monetary tightening is an own goal, the broader malaise in the euro area has a clear resemblance to those of America and Britain—and that which has gripped Japan since the 1990s. As Kenneth Rogoff, co-author of a recent 800-year history of financial crises, has pointed out, the recovery of debt-laden Western economies was bound to be slow and halting. Central banks may be the last people standing, but they cannot produce better growth out of nowhere. The emerging markets which provided a cushion during the financial crisis look less helpful now, especially if they put up capital controls in the face of a new round of QE. The sharp equity declines in August suggest investors understand the grim reality of a long period of slow growth.”