With QE times infinity in place, can central bankers boost growth?

In a post yesterday, Nobel prize winning economist Joseph Stiglitz made the case that monetary policy was not going to end the financial crisis and something else was needed.

Professor Stiglitz argued for fiscal stimulus.  I argued for first dealing with all the bad debt in the financial system and then having fiscal stimulus.

As luck would have it, a Bloomberg column that appeared today by William Pesek provides the answer.

The issue for Bernanke is to look where quantitative easing failed first. 

He did, of course, even before the practice formally existed. The Fed chairman made his mark at Princeton University with papers such as “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” in 1999. He applied those lessons to America’s own brush with a depression in 2008.

Fresh insights can be gleaned from Japan. 

The notion that buying financial assets from banks and other private institutions adds oomph to monetary policy was born in the country 11 years ago. It has been a flop. 

Just ask Japan’s newest finance minister, the fifth to hold the job in three years. I debated whether even to mention Koriki Jojima’s name here. You have to wonder how long this one will be around. 

It is no mystery why finance czars keep falling on their proverbial swords: The economy is no healthier than it was in 2001, when Japan’s central bank invented “QE.” Why? 

Because the BOJ never fully embraced QE as it was originally envisioned. 

The main criticism of former BOJ Governor Masaru Hayami, who held the job from 1998 to 2003, was that he didn’t pump enough yen into the economy to generate inflation and growth. 

In reality, his mistake was that he didn’t take lenders’ toxic assets onto the BOJ’s books so banks could return to the job of credit creation. Hayami focused, instead, on relatively conventional open-market operations to lower interest rates. The amount of liquidity increased, but confidence among bankers didn’t. 

“It’s like filling a bath with the plug out,” says Nicholas Smith, a strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo.

Please re-read the highlighted text as this is the point that your humble blogger has been making.  The bad debt in the financial system needs to be addressed before applying monetary and fiscal stimulus.

This explains why the Swedish Model for handling a bank solvency led financial crisis works.  It removes the bad debt in the financial system by making the banks absorb the losses and then applies monetary and fiscal stimulus.