Chris Giles’ excellent blog has highlighted the ‘rationalisation after the fact’ of QE – changing your mind about how it works.    Taking the MPC minutes, they demonstrate how the emphasis has changed over time, using an amusing colour coded pair of tables.  Their conclusions:

it is obvious the Bank has flipped and flopped over the intermediate objectives for QE last year. It was all about expanding the money supply and the price of corporate bonds until it wasn’t; it had little to do with lowering gilt yields and then that is what the public should focus on

This is annoying: I have been doing the very same thing, except getting more personal.  This is from my upcoming publication:

Massive changes of mind, and outright disagreements.  At the beginning: it will work through bank lending.  Mervyn sticking for the ‘it’s about money innit’ line when Adam and David expclicitly deny it.

The end of QE happened today.  Much righthandwringinging over this.  But this is hardly a gilt ‘plunge’, Guido, and you know it.   What a shocking removal of context from a graph.  Here is a better timescale:

Like I said earlier, why do people think they can beat the market on the basis of a widely anticipated event? Fidelity still see reason to buy gilts.  One reason the Bank has ended the programme may be because it thinks the stock not the flow of QE is what counts (see Ed Conway).  I am with Ed: they make a much bigger difference as they are happening, than through just sitting there.  Reserves created are fairly inert at these levels of rates and activity, IMHO.


13 thoughts on “Changing your mind about QE

  1. I don’t think this is just something the MPC has been doing. One of the reasons I’m skeptical about QE is that when I look around so many good economists seem to disagree on what it’s for or whether it’ll work.

    Not only has Guido removed context (what is it with the right and trends over time?), but he has committed one of my pet hates: people predicting day-to-day changes based on the upcoming political events of the day/people linking the day’s changes with the political events of the day. The BBC, for instance, does this all the time e.g. “RBS stocks down 3% on the news of Obama’s proposals” (or whatever). Unless it’s a really big change, comments like those are pure pseudoscience.

    1. Yeah, you can have a lot of fun with this. I often glance at the FTSE, and find myself thinking “Oooh, they haven’t taken the latest Celebrity Big Brother eviction at all well, have they?”

      Personally, I don’t think there has to be unanimity about mechanisms for it to be a good idea; but different mechanisms produce different results, and these are a political matter at this stage. A stimulus that just helps the wealthy elite . . . is not a very good stimulus.

      Giles (one of the wealthy elite)

      1. I agree with you, but I’m just a layman with an interest in economics, so it sort of comes down to what you said in this recent post:

        And it’s actually even worse than that, since it’s usually fairly easy to tell when someone who doesn’t think the world’s warming is talking rubbish (e.g. “it stopped in 1998”).

        Similarly, with economics, I can get a good feel that (say) we should be using Keynes and not Fama.

        But on the specific point about QE, it’s not just that economists disagree about it. It just seems that the basic principles from which they argue from are different (that’s not quite what I mean but I dunno how else to put it) – so it’s very hard to even compare the different arguments about QE. It’s like one group is talking about global warming on Earth, while the other group is babbling on about Neptune. Or something.

  2. Giles,
    The best thing I’ve read on all this was that Standpoint article by Tim Congdon – The Unnecessary Recession and written back in June ’09 (for your chart?). If the following quote is not helpful, then do cut it, but the last sentence in para 2 suggests the measure by which we will know whether QE has done a job, whether we need more, whether the worst is behind us.

    “In short, although the cash injected into the economy by the Bank of England’s quantitative easing may in the first instance be held by pension funds, insurance companies and other financial institutions, it soon passes to profitable companies with strong balance sheets and then to marginal businesses with weak balance sheets, and so on. The cash strains throughout the economy are eliminated, asset prices recover, and demand, output and employment all revive. So the monetary (or monetarist) view of banking policy is in sharp contrast to the credit (or creditist) view. Contrary to much newspaper coverage, the monetary view contains a clear account of how money affects spending and jobs. The revival in spending, as agents try to rid themselves of excess money, would occur even if bank lending were static or falling.

    “The important variable for policy-makers is not the level of bank lending to the private sector, but the level of bank deposits. (Remember Irving Fisher’s reference to “deposit currency”.) Indeed, because companies are the principal employers and the representative type of productive unit in a modern economy, bank deposits in company hands need to be monitored very closely. If these deposits start to rise strongly as a by-product of the Bank of England’s adoption of quantitative easing, the recession will be over.”

    When I first came across your excellent site it was a review of Vince Cable’s ‘Tackling the Fiscal Crisis’ and I asked you when he was going to write a piece on ‘Tackling the Monetary Crisis’?

    Money supply figures are still disturbing (and Macro Man’s Base Rate /Employment chart suggests an optimal nominal base rate of minus 2%). Either QE hasn’t worked or we need more. Either way we are not out of the woods yet.


  3. Bill

    I read and disagreed fundamentally with the Tim Congdon article, and his predictions have been dreadful – read his FT article “How to end the recession with speed”. I included chunks of that quote in my latest draft of QE.

    The QE piece should be out end of month; I really hope you like it.

    We need QE redirected.

  4. How about this a defence of the Bank?
    The justification for QE lies not in gilt yields or M4, but in the way it changed investors’ subjective probabilities. QE worked by reducing the probability people attached to a catastrophic collapse in the financial system; the Bank, in effect, said: “Look, we’re doing anything we can – including some weird stuff – to avoid disaster.”
    This succeeded; the lower chance of disaster led to higher share prices and lower credit spreads.
    But the Bank could not explicitly say this at the time, because to have done so would have been to draw attention to that chance of disaster, which might have spooked the markets.
    All this talk about expanding M4 or reducing gilt yield – the two aren’t just different but contradictory – was just guff, but necessary because it was dangerous to mention the true justification. As I’ve said, sometimes policymakers have to be dishonest.

    1. I agree with that, and reading the print of the FSR and other Bank publications, they seem to acknowledge it; the money has been the ‘bazooka’ that Paulson hoped not to bring out for Fannie and Freddie.

      They have granted a huge free put on risky assets. For people like me who repeatedly sell FTSE options, it represented a huge profit. If that is effectively what a lot of financial players do – promise to stand firm in a disaster, in return for a steady payment – then no wonder City profits have soared.

      It has worked, but in no way how the original Bank leaflet explained “Boosting spending in the economy”. I think it could have done better

  5. Giles,

    Shall look forward to your piece on QE. I think you are too hard on the Congdon analysis.

    Have you seen this fascinating dialogue between Congdon and Skidelshy in Standpoint Dec 1st 09 reproduced on :

    Again a quote from the dialogue. I realize in my selection that RS hasn’t a lot to say and that it is therefore not representative of the full exchange, so I have added a chunk from him which comes a little later. I hope the selection might just persuade you to read it on the way home .

    TC: … If we hadn’t had quantitative easing the quantity of money in this country would have fallen in the last year by about five to ten per cent, which isn’t that different from the rate of money contraction seen in the American Great Depression. So quantitative easing has prevented a calamity. Money growth hasn’t risen very much, but it hasn’t collapsed and that is a very good thing. I’m pretty sure, by the way, that Keynes would not have disapproved of that.

    RS: No, I agree with you.

    TC: And that’s quite important — I think Keynes would have blessed quantitative easing. And further on that, my second point, which is crucial. The state can create money in at least two ways. One way is, if it’s running a budget deficit, to finance that budget deficit from the banking system, either the commercial banks or in the extreme the central bank. OK, every economist knows that. But there’s another way of doing it, which is to run a responsible fiscal policy and to monetise the existing public debt. And what I advocated in my pamphlet earlier this year on How to End the Recession was not to increase the budget deficit. I in fact put an increase in the budget deficit in the category of “bad and/or uninteresting ideas”. Instead my proposal was that the government and the Bank of England, working together, should monetise the existing debt.

    How? What about the mechanics? The government borrows from the commercial banks, the government then has a new deposit created for itself, and the government then uses that deposit to buy back its own long-dated debt. The result is to create new deposits, new money, in private sector hands. Do you know where I got this idea from, Robert? I got it from Keynes.

    RS: Yeah, yeah.

    RS: I would say that you certainly have to try and use all your instruments to maintain a rate of monetary growth, but to me that depends on fiscal policy and not just monetary policy. I’ve always thought that it’s a matter of causation, and there’s a very complicated pattern of causation between money and the real economy, and you have to make sure that the real economy grows — that is the important thing. In other words, you have to overcome the output gap, which is projected about five per cent — the economy will have contracted by five per cent by the end of this year. You have to stop the growth of unemployment. Tim keeps saying you’ve got to ensure that money supply grows by five per cent and that’ll cure these other problems. I don’t think it will on its own, and that’s been the nub of the disagreement between us.


    1. I sort of agree with TC in a way here – in particular the influence of Keynes, who was as much important for pointing out the possibility of insufficient demand as advocating fiscal policy. But restrospectively monetising debts does not make anyone do anything in the economy right now- it maybe frees the goverment up to do more, but then we are back in fiscal policy. I still think monetarists give too much credence to the importance of money balances as opposed to animal spirits in determining behaviour.

  6. Fiscal policy and monetary policy (especially around the zero bound and the liquidity trap) are unified in the PSBR and its funding.

    I seem to remember from 1980 that delta M = PSBR – delta non bank private sector loans to public sector + delta bank loans to public sector. Of course this equation was developed as an argument for using the PSBR to control the (increase in) money supply. But surely it works the other way when you need to increase the supply of money when price and quantity methods won’t work.

    I take it that your lack of confidence in following a policy advocated by TC was reinforced by the failure of his February predictions to come good. I think he just failed to see the extent of the reduction in money supply. He predicted at that £100 – £200 billion of QE would be enough to compensate (just as in Nov 07 he failed to see the extent and speed of the deleveraging and voted for no change in interest rates whilst a member of the shadow MPC).

    That does not invalidate the proposition (not his) that we could have had the public sector temporarily stepping in to replace the lost AD in a way that also increased/replaced the supply of money destroyed during deleveraging. (ie by financing more of the PSBR through bank lending to the public sector, viz the above equation.)

    An economic policy to boost both AD and the supply of money could have been a central part of a political policy that declared that the emergency was actually a once in a generation chance to reform the country: transforming the economy by investing in homes, transport, power supply, WiMax, skills etc. in // with persuading people of the need to transform the political economy, tax and benefit system, political decision making system etc.; a Plan for National Reconstruction and Renewal.

    We have used up valuable time and political capital – wasting the opportunity to lead the country in this direction. Now we are moving inexorably towards a period of further reduced aggregate demand as G is cut and T raised (which also entails money destruction or foregone money creation).

    1. I particularly agree with your last three paragraphs there, but i think it requires fiscal policy to be further expansionary in some way, or an explicit promise to actually permanently monetise the debts of the government. Does Congdon agree with that – a permanent inflationary write off? I think Sumner does.

  7. No he doesn’t Giles, which is why I said (not his proposal) in para four.
    But that doesn’t stop us saying it and campaigning for it. And you have built a great platform if you wanted to make the case.
    QE is rightly ridiculed by you ‘poets’. It was a central bankery thing. Had the PSBR been funded by bank lending the cheques issued by the GOv would have gone to teachers, doctors, builders at work on public projects, trainers in skills centres, etc. And if we had the public sector using small not for profits then most would have gone into the local economies where the not for profits operate and recruit…

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