It is becoming increasingly difficult for central banks to surprise the markets with good news. No matter how dovish they are, investors expect them to be even more dovish still. This financial repression has facilitated the rise of populist politicians, who threaten to bring the end of central banks’ independence.
Ever since the financial crisis, when central banks saved many people from the consequences of their bad financial decisions, monetary policy around the globe has been a race to the bottom.
If anyone sees the connection between ever-tolerant monetary policy and the rise of populism — especially in places like the US and the UK, where until not long ago it would have been thought highly unlikely – they are not shouting very loudly about it. But there definitely is a connection, and it will be almost impossible to break.
It started at the height of the financial crisis of 2007-2009, when the Federal Reserve and the Bank of England slashed interest rates and started printing money to halt the falls in asset prices (in particular property prices, as houses are no longer considered homes for people to live in, but financial assets to be speculated on).
However, those falls were the consequences of reckless lending by banks and irresponsible borrowing by people who believed that property prices could only go up and therefore they must get on the “property ladder” as soon as possible. To stop the bubble from inflating, asset prices should have been allowed to fall until they found their natural bottom.
But ever-rising asset prices are the main illusion entertained by politicians keen to give voters reasons to vote for them. Inflating a property bubble is easy: on the one hand, have your central bank print the money the banks need to lend to homebuyers; on the other, subsidise the property sector with taxpayer money in various ways.
In the US, the taxpayer subsidy was given via Fannie Mae and Freddie Mac, the two government-sponsored enterprises that guaranteed home loans. In the UK, it has been carried out via programmes such as Help to Buy (which should really be re-named Help to Sell) and tax relief for buy-to-let-landlords.
While helping enrich some people, these measures have impoverished others. Rising property and stock prices increase the wealth of people who were already invested in those assets, widening the gap between them and the poorest in society, who don’t have access to them.
In what they probably believed was a clever decoy, politicians allowed the blame for the increasing inequality to be put on immigrants. These are the perfect scapegoats because they do not have the right to vote and generally keep a low profile, in the hope they will adapt to the countries they immigrate to.
It is always easier to bully the weak than take on the strongman, and voters did exactly what politicians expected them to do: ignored their own policymakers’ mistakes, and blamed the immigrants for their negative consequences.
The game is almost up. In the race to the bottom, central banks have been outdone by populists who, encouraged by the fact that every bad financial decision is being cushioned by a wad of freshly-printed banknotes, are making ever-more outlandish promises.
In the US, Donald Trump promises to bend the world to his will via a trade war. In the UK, Boris Johnson promises to force the European Union to grant the UK a better withdrawal agreement than the one painstakingly negotiated over two years.
Credit for the fact that the markets haven’t yet tanked under the weight of these absurd promises must go to central banks, who stand ready to pump more money in the system at the first sign that markets are going south.
But despite their efforts, populists are not happy. Central bank control started in Turkey and continues with Donald Trump’s threats on the Fed. It is only a matter of time before central banks lose the little independence they still have.