Investors fear an upcoming recession. Blackrock Investment Institute, the economic American think tank and global asset manager, just published a study on methods to prevent a future economic crisis.
An increasing number of economists have predicted an immediate crisis, just 10 years after the subprime crisis that flattened the global economy. Indexes are multiplying: the German economy is starting to slow, European and American central banks are still unable to normalize, and American short-term bond yields are higher than those that are long-term. All this is occurring amidst an agitated geopolitical context, marked by a trade war between the United States and China, not to mention a potential no-deal Brexit on October 31st.
Central banks as a solution
Faced with this next economic crisis, the Blackrock Institute believes that the solution must come from central banks. These independent bodies, charged with controlling monetary policy, have already been heavily involved in reviving the economy. For the past ten years, central banks have had to innovate their practices. "Central banks now have a wider range of tested tools at their disposal to combat slowdowns, as well as tools that have been approved internally, but not yet used," stress the study's authors.
However, all this accumulated experienced since the last crisis risks being insufficient for the next one. Between quantitative easing, market debt buybacks and key rate reductions, the American and European central banks have had to follow unconventional monetary policies in recent years.
Such policies have displayed their limits, at least in Europe, by no longer succeeding in the fight against an economic slowdown. Most importantly, central banks are now short on ammunition in the event of a major recession.
The practice of “helicopter money”
The same can be said for fiscal policies in the United States, their tool to revive investment and consumption, which has also run out of steam. Given this, Blackrock suggests better coordination between monetary and fiscal policies in order to increase efficiency.
But the asset manager goes further, advising in extreme cases that central banks adopt a more direct approach. Rather than acting solely on monetary policy, hoping that economic players take over on the ground, the think tank asset manager advises central banks to lend money directly to these players. This practice of "helicopter money", in which the central bank releases liquidity directly on to the market, pushes spending and consumption by economic actors, rather than liquidity hoarding by the banks.
The authors of the study do not suggest the need for a massive and indefinite injection of money into the economy. They advocate the creation of a fund that is able to be unlocked under strict circumstances only, particularly when interest rates can no longer be lowered. The size of this fund would depend on the level of liquidity needed to get the economy back on track and reach a stable inflation threshold. There remains uncertainty about when the predicted crisis will occur. However, according to the study’s authors, the effectiveness of such a device "would depend on it being implemented well in advance of the next economic downturn", so that it is understood by the markets.