Four years ago, Zoltan Pozsar helped change how policy makers visualise the financial world when he worked with colleagues at the New York Federal Reserve to create a gigantic wall map of shadow banking. Astonishingly, it was the first time anyone had laid out these financial flows in detailed, graphic form. And by doing that, the NY Fed researchers showed why the sector mattered – and why policy makers needed to rethink how the financial ecosystem did (or did not) work.
Now Pozsar has left the NY Fed and teamed up with Paul McCulley, the former investment luminary of Pimco (and the man who coined that phrase “shadow banking”) to tackle another issue. But this time, it is not securitisation they want to “map” – but “helicopter money”, or quantitative easing.
For Pozsar and McCulley argue that just as we needed to rethink finance five years ago, we now need to embrace a new mental map of central banks. For while there has been a widespread assumption that central bank independence is always a good thing, they argue, this paradigm does not hold true. “As long as there will be secular debt cycles, central bank independence will be a station, not a final destination,” they insist. And while that assertion will horrify some commentators, the map provides a timely device to stimulate debate; and doubly so given the splits inside the Federal Reserve about the merits of quantitative easing – and the policy dilemma besetting the European Central Bank, as the European economy ails.