There are many schools of macroeconomic thought. Most people agree that some form of stimulus is needed during a recession but what should this stimulus look like? Is monetary stimulus sufficient or do we need fiscal stimulus as well? What should this monetary stimulus look like? Do we need quantitative easing? Or is effective monetary stimulus largely about conditional forward guidance as Michael Woodford and Mark Carney seem to think?
Macroeconomic stimulus in practise is however a one-trick pony that has almost no relation to the theoretical debate. In the developed world since the Great Moderation, macroeconomic policy can be boiled down to one simple rule – prop up asset prices. In the Anglo-Saxon world, the rule is even simpler – prop up house prices. Mark Carney may grab all the headlines regarding UK economic policy but the only policies that matters to the UK economy are George Osborne’s attempts to boost the housing market.
There is nothing novel about this. Alan Greenspan was always quite frank about his approach to monetary policy. For all the talk about Taylor rules and how central banking and monetary policy became a rule-based science in the 1980s, the reality of Greenspan-era monetary policy was much simpler and followed only one rule – do not allow asset prices to fall. Abenomics is simply the logical end-stage of Greenspan’s monetary policy doctrine. Greenspan only needed to cut rates when stock markets tanked but the Bank of Japan needs to literally buy equity ETFs and real estate investment trusts(REITs) every week to prop up the markets. The Bank of Japan would love to provide more support to the housing market but unfortunately its purchases are already too large for the REIT market. Maybe the BOJ could buy up the housing stock of the country and rent it back to the people of Japan? Maybe eventually all assets in capitalist “free-market” economies will be owned by the central bank? What could possibly be objectionable about such an economic system?