Banks: Safety in numbers

I have spent much of the last week involved in banking issues, either talking with banks about their business plans or about them in the context of the Money Macro & Finance Research Group annual conference. One of the takeaways from the week is that insiders and outsiders, not surprisingly, view the sector’s problems differently. Banks are concerned to restore profitability and have outlined their business plans contingent on the current legislative environment, which they believe is sufficient to strengthen their institutions. Many academics and policy makers, on the other hand, want to make banks even safer in order that the integrity of the financial system is maintained and to ensure taxpayers are protected in the event of further problems. Either way, it is a sign of the times that we spend so much time on regulation issues today. A decade ago, financial stability was both a business and intellectual backwater.

Looking at the big picture, there is still a lot of debate on whether the banking system is safe enough. Sir John Vickers, who chaired the Independent Commission on Banking, does not believe it is. Earlier this year he strongly argued that the ICB’s recommendations on capital adequacy had been largely ignored and that banks do not have nearly enough capital to withstand shocks. This is a view which the Bank of England does not share. Vickers’ argument is that although holding equity capital is costly for banks, because investors expect high returns, “high returns make sense only if they compensate for risk ... which is best done by more equity, not less.” In his view, the BoE argument that leverage ratios were ten times higher before the crisis means only that banks today are too risky versus stratospherically risky prior to 2008.

But whilst the argument is sound enough, John Kay points out that efforts to measure bank leverage, as required under the Basel III legislation, represent “bogus quantification.” We cannot adequately measure bank ‘riskiness’, and efforts to put a precise number on it give us a false sense of security. In any case, it is not as if banks were not regulated previously, as anyone who tried opening a bank account even prior to the crash of 2008 can testify. It is more the case that bank regulation was previously misdirected.

This highlights that there is a trade-off between the safety and usefulness of regulation. As Kay points out, the rising numbers employed in compliance represent a heavy tax on banking activity, and banks themselves are being forced to make costs savings in other areas to ensure they can meet the regulatory challenge. Ironically, we will only know that the outlays on additional compliance are being well spent if they prevent banks from incurring the wrath of the regulator. So the less they are in the headlines, the better. But since the actions of regulators on the other side of the Atlantic appear more as a capricious attempt at extortion, it may not matter how much banks spend if they are operating on a far-from-level playing field.

It is interesting when talking to banks about their business plans to note that they are taking a highly pragmatic approach. So long as they have a clear view of what they have to do, and the timeframe under which they have to operate, they seem broadly happy with where we are heading. Indeed, there appears to be a lot more certainty today than there was a year or two ago, when bankers complained that the regulatory goalposts were being moved far more quickly than seemed necessary. It would thus appear that, in the UK at least, the field of bank regulation is beginning to mature. In its early stages, bank regulation was focused on emergency balance sheet repair and there probably was an element of on-the-hoof policy making. Today, we are able to look forward with a bit more certainty, and I am also left with a sense that banks and regulators talk to each other more than they once did.

Macroprudential policy has thus become a key element in the policy armoury. There are some concerns that it may become a substitute for monetary policy – at least in part. For example, the regulators might prevail on banks to change lending practices, thereby operating on the credit supply side, rather than using interest rates to regulate credit demand.  In future, when (if) interest rates return to more ‘normal’ levels, that might be a cause for concern – particularly if the current creeping trend towards the politicisation of monetary policy gathers pace. But this is not exactly a new problem: indeed, for a long period after 1945, the UK operated a form of macroprudential policy in the form of credit rationing. Given what we know happened to the banking system prior to 2008, I wonder why we gave it up.

In sorrow and anger

Contrary to what many economists might believe, economics is to a large degree a normative discipline. Economics cannot exist in some kind of value-free environment: The decisions which people take are conditioned by the society around them, and as a result it is incumbent upon us to try and describe the factors which shape the social background against which we are operating. But assessing the political environment which is shaping the current UK policy agenda is becoming a profoundly depressing exercise. 

In the course of this week the Conservative government has taken a sharp lurch towards the right of the political spectrum, which raises the likelihood that the process of exiting from the EU will be a much more painful process than previously imagined. This in turn means that the economy will be adversely affected, which can be expected to result in many people being made a lot worse off than is necessary. Since last weekend, we have heard the prime minister outline an agenda which cannot be described as particularly pro-business. The PM is proposing additional legislative and regulatory burdens on companies which were led to believe they would benefit from a reduction in the (imaginary) red tape which is strangling them from Brussels (at least that's what they told us). Meanwhile, her successor as Home Secretary, Amber Rudd, suggested that foreign workers should not be able to "take the jobs that British people should do". Rudd also indicated that companies could be forced to publish the proportion of "international" staff on their books.

The large swathes of the British press which criticised former Labour leader Ed Miliband for his supposed anti-business stance could surely never have imagined that 18 months later their preferred choice of party would introduce a stance which makes his policy look almost libertarian. Whilst it is laudable to try and curb the excesses of those businesses operating under conditions which are a throwback to the Victorian era, it is quite another to adopt a populist agenda which is outright damaging. According to the prime minister “too many people in positions of power behave as if they have more in common with international elites than with the people down the road.” This may play well in a conference hall, but when it comes down to the wealth creators that every country needs, it pays not to antagonise them too much – particularly when many of them can simply transfer their production or switch their investment to jurisdictions which are far more welcoming.

As Philip Collins wrote today in The Times, 23 June appears to have been “recast as a mandate for illiberal domestic policy.” And as Jenni Russell put it in the same newspaper yesterday “British politics is now driven by blind faith.” The Conservative Party today is supposed to be the heir to Mrs Thatcher’s vision, adopting the sort of free-market policies designed to boost the functioning of the British economy. But for all the faults of the Conservative governments of the 1980s, it is hard to see Mrs Thatcher going along with the policies which are now up for discussion. Her former aide, Charles (now Lord) Powell, argued recently that she would never have voted for a policy as self-defeating as Brexit. The blessed Margaret may have had her run-ins with her EU partners, but there was always a sense that she understood what was in the best interests of the UK economy. Moreover, she treated her political opposite numbers throughout the EU with a lot more respect than the current government seems to be displaying towards its EU partners.

Such disrespect is likely to be one of the reasons why French President Hollande now appears to believe that a tough negotiating stance is necessary during the Brexit negotiations. It is also the reason why German Chancellor Merkel is hardening her opposition to the British stance. Such uncertainty does nothing to bolster international market confidence in the UK, and whilst the 9% flash crash in sterling overnight may have been largely the result of algo trading, it hammers home the risk that UK assets are “resting on a bed of nitro-glycerine” (to use Bill Gross’s phrase from 2010).

As deputy Italian foreign minister Mario Giro said yesterday, “This is not the UK we have always known.” He also opined that the immigration discussion is “taking on those tones that we see in eastern Europe.” And the unedifying sight of UKIP politicians engaged in public dispute in the European Parliament in Strasbourg does nothing to raise the political status of a country which the rest of the Union will only be too happy to see depart.

Back in the 1960s, former prime minister, Alec Douglas-Home, was asked whether he was up to the top job. His reply, in a self-deprecating jibe at his supposed lack of economic skills was, “No, because I do my sums with matchsticks.” Compared to some of the incoherent ramblings currently passing for policy, Baron Home of the Hirsel is beginning to look like a contender for the Nobel Prize in economics.

May for March

Yesterday’s speech by PM Theresa May, which outlined that the UK will begin the Article 50 proceedings no later than March 2017, left me feeling rather uneasy. It was a speech straight out of Conservative Campaign Headquarters casting, designed to give a reassuring feeling to the assembled masses at the party’s conference, but short on substance. There was a lot to be concerned about: Her statement that “The referendum result was clear” was a case in point. No one denies that the Leavers won the referendum, but it was by less than four percentage points. It was not at all “clear”, as the Leavers would agree had the result gone the other way. And unlike a parliamentary election, where you get a chance within five years to change the outcome, that is not possible on this occasion. So if there is to be a Brexit, it is absolutely vital to get it right, and I have many reservations that the government is going about it the right way. 

The prime minister also made it clear that “it is not up to the House of Commons to invoke Article Fifty, and it is not up to the House of Lords. It is up to the Government to trigger Article Fifty and the Government alone.” There are many lawyers who would dispute that, and indeed next week the High Court is due to give a ruling on this issue. May accused those who sought to challenge the referendum result of “not standing up for democracy, they’re trying to subvert it. They’re not trying to get Brexit right, they’re trying to kill it by delaying it. They are insulting the intelligence of the British people.” Some might say in response that a Leave campaign which blatantly lied about issues such as the cost of EU membership, and how the money saved could be used to fund the NHS, brought the process of democracy into disrepute in the first place. And whilst we’re at it, prime minister, your mandate as leader of the Conservative party was obtained with far fewer votes than Jeremy Corbyn when he won the Labour leadership contest. A little bit more humility regarding the nature of democracy would not go amiss. 

Even dangerous Daniel Hannan has admitted that the referendum result was so narrow that it is necessary to ensure that a peaceful coexistence can be maintained between the sides. We got no sense of inclusivity from PM May yesterday: Had she not (allegedly) been a Remain supporter, I could have sworn that we were listening to the victory speech of a prominent Brexiteer. The general tone of the speech suggested that the UK is on course for a ”hard” Brexit, a notion which May rejected: “there is no such thing as a choice between “soft Brexit” and “hard Brexit”. This line of argument … is simply a false dichotomy. And it is one that is too often propagated by people who, I am afraid to say, have still not accepted the result of the referendum … I know some people ask about the “trade-off” between controlling immigration and trading with Europe. But that is the wrong way of looking at things.” Again, we will have to agree to differ on that one. There clearly is a form of trade off, and to pretend otherwise is simply to ignore what other EU nations are telling us. 

The prime minister’s grasp of the economic realities of Brexit was, in my view, rather shaky. She suggested that “the referendum … was a vote for Britain to stand tall, to believe in ourselves, to forge an ambitious and optimistic new role in the world … And there is already abundant evidence that we will be able to do just that. Important foreign businesses – like Siemens and Apple – have committed to long-term investments in this country. With the Japanese purchase of ARM for £24 billion, we have seen the biggest-ever Asian investment in Britain. Countries including Canada, China, India, Mexico, Singapore and South Korea have already told us they would welcome talks on future free trade agreements. And we have already agreed to start scoping discussions on trade agreements with Australia and New Zealand.” 

Where do we start? How about the fact that the sale of ARM means that the intellectual capital, and the profits which flow from it, are no longer UK owned? Or that Nissan is delaying new investment in its Sunderland plant until the UK has concluded Brexit negotiations with the EU? Or that Australia has said that any trade deal will also have to wait until after the UK-EU deal is concluded? Or that there was no mention of any deal with the US?

However, May’s speech was of a piece with a lot of the statements out of Westminster in recent weeks. As one EU diplomat suggested, “she seems to be saying that regaining sovereignty is so valuable, she is willing to pay a price in terms of economic disruption.” Missing from the speech was any sense that this is a two way bargaining exercise. If the EU refuses to negotiate with the UK before Article 50 is triggered, and its demands are immediately rejected by a French or German government which is deeply involved in its own election campaign, the whole strategy falls apart. Moreover, once Article 50 is triggered, the UK loses any influence over the EU. The best we can say about the prime minister’s speech is that it was designed for domestic consumption only. It’s naïve to think that our EU partners are going to roll over and play ball and I suspect that this sunny optimism will not last beyond the first contact with Realpolitik.

Danger man Dan Hannan

More than three months since the EU vote and we are still waiting – either for the sky to fall in or for the new economic nirvana to unfold before us. But a day of reckoning is a-coming as the noises out of government suggest that a hard Brexit is the most favoured scenario for many in Westminster. This is a dangerous possibility and increasingly my concern is that those who lied their way to referendum victory will never fully be held to account.

My anger was stirred (again) after reading this profile of Daniel Hannan MEP, who is portrayed as the mastermind behind the Leave campaign. I have made the point before that Hannan's vision of a post-EU Britain is not one which the majority of Leavers voted for. Those on the front line of the campaign consistently reported that immigration was the issue which aroused most fury, but the pro-free market Hannan was motivated by the desire for a more dynamic Britain unencumbered by the constraints of an EU superstate (this clip from the BBC's flagship current affairs programme, Newsnight, on the day after the vote highlighted the difference between what Hannan thinks the electorate voted for and what the rest of us think it voted for).

I cannot help thinking that his notion is (to be charitable) a romantic ideal of what Britain once was – a dynamic economic superpower. The prosaic economist in me thinks his ideas are ludicrously naive and I would barely trust him to run a bath, let alone any form of national policy. Let us also not forget that he has worked for the European Parliament since 1999.  The hyperbolic chutzpah of someone who can accept EU taxpayers money to cover his salary whilst failing to act in the interests of the institution which he represents beggars belief (the same applies to Nigel Farage). It would be no less than justice were he to be sued by EU taxpayers for a return of his salary over the past 17 years (and will he forgo his pension?) Moreover, it is claimed in the article that he plans to leave politics in 2019 when his term in Brussels ends. That being the case, he will be another of the Brexiteers who cut and run just as the battle to determine Britain's political and economic future begins.

Hannan has been likened to the militants who infiltrated the Labour Party in the 1970s and condemned it to the political wilderness. One minister described him and his ilk as not "builders. They are destroyers." Another MP called them "grammar school imperialists", who "a hundred years ago ... would have been able to vent their rather bizarre beliefs bullying people in a nether-province of India." The respected Conservative commentator Matthew Parris noted "I don’t think he sees himself in politics to give effect to what the public thinks, but to what the public ought to think, which is quite different.”

Parris went on to argue that Hannan exploited for his own ends the xenophobic tendencies in large swathes of the electorate. Indeed, I have made this point myself (here) arguing that Hannan was careful to distance himself from any charge of xenophobia or racism. Ironically, Hannan and Farage fell out over different aspects of the Brexit debate, with Farage (a man for whose views I have no time) suggesting that Hannan's vision of a free market Britain is not one that he heard on the doorsteps during the campaign.

The extreme free market policies espoused by Hannan (who like another right wing Brexit supporter, Allister Heath, did not spend his early years in the country they want to make great again) are misguided. The logical conclusion of the policies being espoused imply a UK which will have to scrap many of the laws and social protections which have made life relatively tolerable for most. If you think George Osborne's fiscal policy was regressive, wait until you see what Hannan-style economic liberalism requires.

Politicians will be forced to adopt a position between the Scylla of minimising economic pain by allowing some form of immigration (which is Hannan's preferred position), and the Charybdis of putting up the barriers and taking the risk of a big hit as economic relationships with the EU change irrevocably. As a very interesting blog post in The Spectator pointed out, Brexit could well result in the rise of the politics of resentment. If we are no longer able to blame the EU for our ills, "there is no other ‘other’ for the populist right to turn on except immigrants. They will be blamed if Brexit brings job losses and falls in living standards."

This may be alarmist but it's plausible. And it reminds me of the words of Pastor Martin Niemöller who could have been describing the position of many Brexit voters: 

“First they came for the EU supporters, and I did not speak out -
Because I was not an EU supporter.
Then they came for the immigrants, and I did not speak out -
Because I was not an immigrant.
Then they came for me - and there was no one left to speak for me.”

The economics of Bake Off

Those of you not in the UK may wonder what the relevance of a popular BBC television programme has to do with economics, but please bear with me. The story concerns a programme called the Great British Bake Off, which has been poached by Channel 4, a rival domestic channel. Big deal, right? Yet it has commanded a lot of newspaper column inches over the past week or so, suggesting that it is an issue of cultural significance. It is also a story of great economic significance.

To recap, The Great British Bake Off is a show in which ordinary members of the public compete against one another in a baking contest. It has struck a chord with the viewing public who like the idea of a wholesome TV show with four presenters who are down to earth, generally sympathetic characters. One of the undoubted stars is its 81 year old presenter Mary Berry, who has become the nation's favourite grandmother and endeared herself to millions. In these troubled times, the show has captured the imagination of the viewing public for its sheer ordinariness.

Imagine the horror when it was announced that the independent production company which makes the show asked for more money from the BBC than it was prepared to pay. So it was picked up by its commercial rival Channel 4. However the show's three female presenters have announced that they will not go with the show when it switches channels and only one (who is male) will transfer.

Despite all the ballyhoo, it is after all just a TV show. But it demonstrates a number of features of how modern economies work. For one thing, it provides a test of the power of franchising. It is one thing for McDonalds to set up thousands of franchises in order to provide the same meal experience across the world, but does it work quite so well in services, particularly when they are personalised in the way that TV programmes are that rely on its presenters? Having lost 75% of the onscreen team, will the new programme be able to retain the same appeal? We have already had the experience here in the UK of Top Gear, a product sold around the world, which lost all of its presenters and the new team was simply unable to recreate the chemistry of the old one. In a wider context, this raises the question of whether any personalised service can be treated as just another commodity? The argument underpinning much of the UK's market economy over the past 30 years is that they can. But if you are unable to replicate exactly the same conditions under changed circumstances, what you actually have is a different product.

It is hard to put a price on star quality, but that is what we are talking about here. If we think of it in standard microeconomic terms, we can almost exactly replicate the supply curve, but not quite. Moreover, we don't know the shape of the demand curve for what is essentially a different product. Therefore even small changes in the position of the demand and supply curves could result in a vast change in the size of the audience.

There is also a potential problem in that Channel 4 may be considered an inferior good to the BBC, which may reflect some lingering snobbishness associated with commercial TV in the British psyche. Channel 4 does some things very well but it does not compete with the BBC for the same demographic. Older viewers, for example, are more likely to be irritated by the ad breaks. Or it may be that Channel 4 simply cannot match the BBC's brand name, which has after all been broadcasting since 1922, whereas Channel 4 first hit our screens in 1982. From an economics standpoint, you would have thought that Channel 4 should be paying less, rather than more for the product given that it has a smaller audience share.

Then there is the motivation of the presenters themselves. The three ladies opted to demonstrate loyalty to the BBC and not follow the show to Channel 4. But Paul Hollywood is following the money. This may reflect Hollywood's more entrepreneurial background. It may say something about the different attitude of men and women to brand loyalty (I'm out of my depth on this one). Either way, it says something about the different motivations that drive individual's economic decisions.

Above all else, what all these issues demonstrate is that there are numerous complex factors which determine whether changing the underlying conditions result in economic success. Brand loyalty above all explains why the Brits are attached to their National Health Service and are loth to see radical change. The fact that Bake Off is able to switch channels in this way is exactly the kind of free market in services that the Thatcher government strove for in the 1980s. But whether it is what the public wants, we shall let the viewing figures be the judge.

Labour pains

The announcement that Jeremy Corbyn has been re-elected as Labour Party leader here in the UK reflects the profoundly depressing state into which Western European politics has sunk. He professes to offer "a new kind of politics." In reality he is offering the same left wing ideas which were decisively rejected more than 30 years ago. Many people do indeed want a new kind of politics. But I suspect they don't want his.

Corbyn is nothing more than an idealist, which would be great if he were not the Leader of Her Majesty's Loyal Opposition charged with holding the government to account and seeking to form the next government. We know what he is against but less about what he stands for. Corbyn is opposed to the market capitalism espoused by the Conservatives and which so many people have railed against, and he taps into those who believe that the fiscal policy offered by George Osborne was brutal and regressive. Whilst it is perceived to have favoured the rich at the expense of the poorer elements of society far more than it actually did, it created the conditions for a political alternative to act as a counterbalance to try and heal some of the social divisions which it created. But nobody has a clue what sort of policies Corbyn actually advocates, and his leadership performance after one year in the job has been dreadful. Over the summer Labour MPs refused to back their leader following his dismal non-performance in the EU referendum and this was followed by the likes of Thomas Piketty, Simon Wren-Lewis and David Blanchflower, who all sat on Labour's economic advisory committee, distancing themselves from Corbyn’s team. 

In Blanchflower's words "Corbyn doesn't seem to care about being a leader of an opposition party. He seems more interested in addressing crowds of supporters around the country. It doesn’t seem to matter to him – although it should – that three-quarters of his MPs, who doubt his leadership qualities, rightly passed an overwhelming vote of no confidence against him. He should have quit. He doesn’t have enough MPs who support him to be able to form a complete shadow cabinet. Incidentally, if there were even the slightest prospect that he could become prime minister, the bond and equity markets would eat him for lunch."

It strikes me as bizarre that 313,000 of the Labour Party’s 600,000 members have chosen a leader who will almost certainly be soundly beaten in any election. If party members really  care about choosing someone who can achieve the things the party proclaims to stand for, they should at least choose a leader who has a fighting chance of winning the popular vote. When the majority of the party's MPs do not back their leader, they have no chance.

The UK’s domestic political shenanigans have not gone unnoticed abroad, and the German newspaper Die Welt notes that Labour's irrelevance is dangerous for Europe. At a time when the government is trying to negotiate an exit from the EU, the Labour Party is so self-absorbed that it is in no position to hold the government to account. When we live in a surreal world where  arch-Brexiteer Boris Johnson is the foreign secretary and he is still not the biggest incompetent in the House of Commons, you know that something is sadly wrong with the state of British politics. That said, when Beppe Grillo, an Italian comedian, can turn his Five Star movement into a national political force, you realise that the malaise runs throughout European politics.

Tony Blair may be reviled as Labour leader but he knew very well that British elections are won by capturing the political centre. As he put it, the Labour Party needs to be “the face on the placard” rather than the protester holding it for a chance in government. People in the party today "don’t really want to be in power, they want to make the people in power respond to their concerns." Until that changes Labour will not be a serious political party, they will simply be seen as a protest movement. And in the current political climate, that is very dangerous for the health of our democracy.

All the way with the BoJ

The Bank of Japan is nothing if not innovative. After all, it was the BoJ which first attempted a policy of quantitative easing in 2001, which involved buying large amounts of securities in order to flood the economy with liquidity in a bid to stimulate inflation. Central bankers in the west treated Japanese QE as an interesting intellectual exercise but never really believed that they would ever have to implement it. But some eight years later the Fed and BoE were doing exactly that.

Meanwhile the BoJ has tried everything it knows to raise inflation to 2%, which was a key element in the Abenomics strategy unveiled in early 2013. The BoJ has bought huge quantities of securities and in the process has raised the central bank balance sheet to around 90% of GDP, which is more than three times that of the Fed, ECB or BoE. But buying ever more financial assets is simply not working as inflation remains stuck at extremely low rates.

So the BoJ opted this week for a different tack: Its two-pronged approach seeks to control the yield curve by holding 10-year yields at zero and allowing inflation to overshoot the 2% target. Such an approach differs from the standard QE policy in as much as it fixes the long end of the curve, rather than driving it down. Using the standard levers to control the short end allows the BoJ to steepen the yield curve, and reduce fears that driving down short rates will hurt the banking system. The idea is that the BoJ, which already has a long track record of asset purchases, only needs to tell the market that it has a 0% target and investors will fall into line without the need for a huge rise in central bank purchases. In essence, it will be a cheaper way for the BoJ to hold interest rates down, and if it is successful in stimulating inflation, will push down real interest rates and thereby give real activity a lift. The idea of overshooting the inflation target relies on the argument that more inflation tolerance will be necessary in order to move expectations to be consistent with achieving the 2% target in the first place.

But central banks have long avoided trying to control the longer end of the yield curve, arguing that it is difficult to do so and introduces distortions into asset markets as they seek to fix the benchmark risk-free rate. Indeed, if the market decides to test the BoJ’s resolve, it may end up having to buy a lot more paper than under the current QE policy (which, by the way, will continue to run in parallel). There are other serious flaws in the strategy: The commitment to fixing the 10-year yield means that in the event of a bond market sell-off which prompts a global rise in yields, the BoJ is required to continue expanding its (already large) balance sheet indefinitely. Some analysts have pointed out that the BoJ is relinquishing control of real interest rates whilst policy becomes highly pro-cyclical. For example, if there is a negative demand shock that raises demand for JGBs (i.e. yields fall) and depresses inflation expectations, the BoJ will reduce the amount of JGBs it buys whilst falling inflation expectations put upward pressure on real rates. All in all, given the BoJ’s failure to achieve its policy objectives over the past 20 years, scepticism remains high that this policy will be no more successful than the others.

We also now run the risk of straying into the area of debt monetisation. Balance sheet expansion of the form implied by QE is meant to involve a temporary expansion of the central bank’s asset holdings. The theory is that they are run down over time, otherwise the central bank merely holds assets until such times as they mature and hands the proceeds back to the government. Nowhere are central banks talking about running down balance sheets. In theory, if the BoJ is forced to sell bonds in order to hold nominal yields at zero, this could be one side effect, but the presumption is that balance sheets should rise rather than fall. Continued balance sheet expansion creates all sorts of problems because (a) it raises governmental moral hazard risks and (b) in theory could unleash much more serious inflationary pressures than central banks are aiming for.

Whilst the BoJ’s QE policy in 2001 was an experiment which was copied by other central banks some years later, I seriously hope this is one lesson we don’t copy in Europe (for one thing debt monetisation is prohibited in the euro zone). It looks like a policy of desperation: if flooding markets with liquidity cannot stimulate inflation, I cannot see how yield curve control will. Boosting liquidity leads to higher inflation when it is transformed into the purchase of goods and services. In an ageing society like Japan, where people are content to sit on their money balances, greater liquidity provision will not prove to be the inflation stimulant which the BoJ seeks. I have long maintained that efforts to get Japanese inflation back to 2% without some help from global conditions will not work and I remain sceptical that these measures will do the trick either.