Inside Money: More money parks available as central banks lube up

Collateralised parking obligations never really took off. File photo / NZ Herald

A friend of mine once built up such a backlog of parking tickets we toyed with the idea of packaging them up into an investment product.

While the collateralised parking obligation (CPO) never caught on, the concept wasn't far away from some actual practices described in this just-published International Monetary Fund (IMF) paper, 'Money and collateral'.

"In recent years, the financial system converted a huge stock of claims on future revenues (loans, cell phone fee receivables, etc.) from illiquid claims into notionally highly liquid claims. In the process, this created a demand to securitise other claims, such as legal damage claims, awards, lottery payouts, etc," the paper says.

Indeed, central banks around the world, including our own Reserve Bank, accepted lower-quality assets as collateral in order to get money moving again in the post Lehman Brothers liquidity shock.

But, in the section titled 'Monetary policy and financial lubrication', the IMF paper suggests central banks might have to inject some more grease.

"In considering an appropriate degree of balance sheet expansion, it is important to recognize that what has been done so far by the key central banks may not have sufficiently substituted for the loss in financial collateral, particularly to the extent that traditional QE may have merely substituted D for C1."

Read the full paper if you want D and C1 properly explained (QE has entered common speech, hasn't it?). But essentially, D is real central bank-endorsed cash, C1 is D-like, while other assets, such as my notional CPOs, would be classed as C2, which have typically proven hard to swap into D in a crisis (see the GFC).

This could lead to dangerous levels of C2 leaking on the taxpayer, the IMF paper says, as: "Swaps of 'good' for 'bad' collateral may become part of the standard toolkit.

"If so, the fiscal aspects and risks associated with such policies-which are virtually nil in conventional QE swaps of central bank money for treasuries-are important and cannot be ignored.

"Furthermore, the issue of institutional accountability and authority to engage in such operations touches at the heart of central bank independence in a democratic society."