Malikane’s QE proposal could yield untold financial instability for SA’s economy
If global inflows from global QE are combined with domestic QE, the combined domestic liquidity can cause an asset price bubble to burstProf Christopher Malikane concluded a recent opinion piece by saying “ ... a QE programme ... would significantly ease the fiscal constraint on government and support liquidity provision to the banking sector, thereby ensuring financial stability”.
Between Malikane and Reserve Bank governor Lesetja Kganyago, a hypothetical R500bn is used as a quantum for contextualising the QE example, and on that basis their respective calculations yield a profit of about R32bn by the former and a loss of about R19bn by the latter. On a nice sunny day we may express these numbers in ratios of some relevant macroeconomic indicators, to give context to the benefits of this exercise, but I would not bother sweating such small arithmetic at the macro scale.
So, in the QE context, the governor must wear all his hats, that of price stability and financial stability and the interplay between the two policies. The governor is legitimately worried about inflationary effects of QE and so should all the sectors of the economy, but one must be mindful of his broader mandate, which is financial stability.
Reckless lending destroys the borrower, the lender, the bank and the fiscus. Reckless lending is often rife when banks have excess liquidity in relation to bankable projects. Liquidity in the banks’ hands mean they are obliged to remunerate those they have sourced the liquidity from.
A rhetorical passing question would be, do domestic banks and borrowers see interest rates at current settings still as a barrier to the supply and demand for credit in the domestic economy? In an unsterilised QE situation one can overload an assumption, where you would add a burdensome case for the Reserve Bank, working with the Treasury to come up with what one might term selective conditional quantitative easing .
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