Wednesday 7 January 2009

Quantitative easing: the case for 'printing money'

'Brown plans to print more money' was the front-page headline on tonight's Evening Standard, and tomorrow's Daily Mail front-page splash follows suit. With interest rates set to fall again tomorrow to their lowest level since the Bank of England was founded in 1694, the question is whether government should look at expanding the money supply. 'We are looking at the issues. No decisions have been taken', a senior Treasury source tells the Standard.

I don't have the technical economic expertise to judge the balance of risks.

Somebody who does is Rachel Reeves, who is the prospective Labour candidate for Leeds West and also a former economist at the Bank of England. She makes the case in the new Fabian Review.

Reeves' article 'Why £20 billion is not enough' identifies four priorities for further action following the pre-budget report's stimulus package.
1. action on bank lending;
2. supporting the mortgage market with guarantees for securities backed by new mortgages;
3. financial reform through the G20;

4. Print More Money

Quantitative easing, a radical policy option which was used in Japan in 2005 to end their 15 year recession, could be used now in the UK. Quantitative easing is a policy tool used when conventional monetary policy no longer works - as they nominal interest rate approaches zero. The Bank of England can either print more money or buy government and corporate debt so that long term interest rates fall. Quantitative easing is not without risks (it can push up inflation) but the potential benefits now outweigh these risks. Such a strategy is increasingly seen as a way to kick-start the economy and should be adopted.

But 'quantitative easing' is a complex issue. Jeremy Vine got rather tongue-tied over it as the BBC's Paul Mason tried to explain it on his show on new year's eve, while the phone-in saw an A-level student point up the hyper-inflation of Weimar Germany, while Mason pointed out that comparisons with Zimbabwe were absurd, when the risk is deflation, not inflation.

This highlights the difficulties of the public politics.

But if the Bank of England does now believe that the evidence demands action on the money supply, then it would make little sense (as with the 'n-word' debate over public ownership of Northern Rock, and then the banking bailout) for worries about political taboos from a very different context to be a veto on necessary action.

Standard Business Editor Neil Collins writes that "this is not be as daft as it sounds when inflation is melting and there is a danger that the broad money supply will start to shrink. If this is allowed to happen, the recession could spiral into a slump, with catastrophic consequences".

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