CentreForum’s latest piece of research, and mine, is launched today.   The website explaining what it is about (roughly) can be found here.

The PDF itself is here.

The report is meant to fill a huge void – QE is simply not being discussed enough as a political matter.  Too many people are taking at face value the Guv’nor’s assertion that this is a ‘natural extension’ for monetary policy.  What King meant was that they normally swap money for interest-bearing instruments, that’s what they are doing now, so really it is just the same … I hope in my report to show that this is not so.  There are many effects of QE that are not particularly natural, and fundamentally involve politics. And I suspect that many in the Bank realise this and would not mind it being better understood.

I am in particular exercised about the distributional impact of cheaper money in the last year.  As a well-off person who is also numerate, I am quite capable of being able to discern how much wealthier such interventions have made people who have property in some way.   This chart is a rough attempt at the question:

QE involves a fair amount of background explanation.  I have had to learn a fair amount myself.  The Bank, too, has changed its mind through the last year about HOW it works – as Chris Giles demonstrated a little while ago.  To talk about it, you have to talk about whether it boosts bank lending, works through higher money, or changes expectations.  Even if you think some of these are a red-herring, you need to cover them.

I found the Expectations theory part the most interesting, and this seemed to be worth covering in depth because it seems little discussed. My enthusiasm has partly stemmed from the excellent guide to this topic that I found in The Money Illusion, Scott Sumner’s passionate blog about how monetary policy could (in his view) have prevented the recession.  On that particular point, I struggle to agree.  I address the weak hold on expectations that I think the Bank of England has, and its struggle to really go for it on growth. However, I think Sumner is right that monetary policy can still work but in harness with the fiscal side.  Other thinkers like Kruguman and Eggertsson agree too.

There are a few views in this report: in fact compared to A Balancing Act, which was more backward looking, it has more hostages to fortune.  Like Chris Dillow in this early appraisal of QE, I find talk of hyperinflation silly.  As you know from this blog I see deflation as the greater risk – when you weight the consequences.  If inflation is 2-3% higher than it should be for a period, I think the mess will be easier to clean up that a prolonged return to recession.

Something I wish I had emphasised more (but is still in it): whereas QE is conventionally understood to be there to boost demand, the recent signs that cash-strained businesses hold back on price cuts to preserve liquidity suggests that better-directed QE may play a role in boosting short-term (and maybe longer) supply.  Inflation may be associated with a scarcity of inputs, making them more expensive; well, working capital is an important input.

I have many people to thank. I cannot come close here. However I would like to cast a fond memory on Duncan’s Economic Blog, which had an excellent idea for using it to increase investment levels in the economy.  This encouraged me to be more bold.  Andyou may have read my suggestion for more ‘credit easing’. This post of Buiter‘s – a sadly discontinued blog – gave some real impetus in that direction.

Expect me to remind readers of this many times this week….


4 thoughts on “‘Credit where it’s due’ is launched today

  1. Fantastic paper.

    But while I agree with the conclusion – that QE needs to be used more effectively to tackle the actual failures in the credit markets that are impeding recovery and that that requires decisions that are unavoidably fiscal – I think the paper makes too light of the implementation challenges. Have a look at Capital For Enterprise, for instance, and tell me how many billions of taxpayer money you would be happy for them to put at risk:
    Creating an effective public/ private investment vehicle of the kind you propose seems right in principle, but do we currently have a viable model for for such an institution that we could roll out sufficiently quickly? If we do, I haven’t seen it.

    1. I have to agree that I was light on such details. There is a risk of producing a paper about everything. But masses of details need working through, I quite agree.

      Many thanks for the compliment

  2. this looks very interesting, I’ll try to find the time to read it. My understanding of QE is ropey – I have tended to look at it as “funding government spending by printing money”, hence I’d thought the distributional benefits are found by comparison to a counterfactual in which the govt does some combination of spending less / borrowing & taxing more.

    p.s. on the “getting banks lending” line or argument, this Felix Salmon post and the D2 post and BIS paper you can find by following the links looks very interesting. That Buiter post you linked to made me think of it.

    1. Thanks Luis – I’d value your comments.

      Personally, in a deflationary position I don’t have a problem with funding govt spending by printing money – it’s just when it enables the govt to hog and expropriate otherwise fully used resources that I think it is really bad.

      That Felix Salmon post looks good

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