And banks did not provide more credit, because they already had some
loans up to the roof, the so-called none performing loans.
All these people which had borrowed money to invest on the stock market by securing
that with their house
which was worth nothing you know because it was at inflated prices.
Then they could not pay back the loans so
banks did not provide more credit when interest rates were at zero.
So here you see the fundamental asymmetry of a central bank policy.
It's way much more effective, it's far easier.
When you don't want the horse to drink water, you just close the tap.
You raise interest rates and that's the end of the credit boom.
But when you want to stimulate [LAUGH] growth and
credit, you open the tap, the liquidity flows,
but banks may not necessarily be thirsty and drink the water.
So, here with the example,
we see that the back of Japan should have looked elsewhere.
It was focusing on the consumer basket of goods and
services to detect any inflation pressures and
it did not find any because inflation was elsewhere.
It was in the asset market and, in particular, in the real estate market.
So here clearly we have an example, it's a debate, but
many economists say you point to the example of the Bank of Japan.
They should have looked, they should have taken two account of this asset price
bubble and raised interest rates way before they did in 89, 90.
Now to illustrate the fundamental,
at this fundamental asymmetry that there is a central bank, far easier to
restrain credit than to stimulate credit and growth.
Just look at this chart, still referring to Japan.
You see the evolution in red, this is the money supply.
And you see the evolution in blue, that's the GDP.
And you see that it starts at 100 in 1980, and now you
see that money supply has gone through the roof, and you see that GDP is flat.
It is not responding as it did up until 1994.
It was responding to the stimulus of the central bank, but since then it was not.
So you see here the problem we have when a central bank conducts expansionary
policy and boosts money supply and brings interest rates to zero or
even negative rates.
In, with the idea that banks will take this free money and
provide more credit to the economy,
it may not actually work if banks are not willing to provide more credit.
Unless they get nationalized, they will not do so.
And so you have this disconnect as we see here between the evolution of money supply
and GDP.