Now for a “Quantitative Easing”

Following the Bank of England’s MPC cut in interest rates to the lowest level in it’s 300 year history, John Redwood MP posted the following comment under “The MPC and the BBC”


I see and hear in today’s media that “quantitative easing” is back on the agenda as a possibility “if all else fails”. I would urge all those about to broadcast or write on this subject to take the precaution of first reading the latest Bank of England Weekly statements. These show that quantitative easing is well underway. The Bank’s balance sheet has ballooned from well under £100 billion last September, to nearly £240 billion by the year end. Just picking up tittle tattle from “sources” can be very misleading.

Actual printing of bank notes has been more limited, but these are up over the year by more than 10%, well ahead of the fall in economic activity and price increases.


In response I posted the following


“The comments by WheresMyVote on 08 Jan 2009 at 4:06 pm  and  Acornon 08 Jan 2009 at 11:14 am    about the recent banking bill proposing to scrap weekly reports reminds me of the New Classical Macroeconomics of the 1980s. A “bastardized” form (as taught by some of my economics lecturers) was that “quantitative easing” would only work on the real economy to the extent that economic agents believed that monetary changes were in fact signals of real changes. This is why, when bringing down inflation in 1980s, money supply figures were headline news, so that the real impact on the economy could be reduced.

The Government, seems to have taken on board a cynical interpretation of “The Rational Expectations Hypothesis” in so far as hiding this quantitative easing, maximizes the “real” impact. It is ironic that some of the Government as students would have marched against the monetarist policies of a generation ago, seemed to have swallowed whole this aspect.

However, the “quantitative easing” will not work, as the cause of the downturn is fact that the previous boom was carried on far too long by artificially low interest rates. Businesses will not invest until the future becomes more certain. People will not buy houses until prices have fallen to affordable levels; until the job situation is clearer; and until they have reduce debt and saved a deposit. Banks would be imprudent to lend more to businesses in order to let their overdrafts escalate out of control, or for house purchase when the value of the house could soon be less than the loan.

The government must wait until the imbalances have cleared before acting. The current action of reducing interest rates and “quantitative easing” will only work in so far as they will further delay the necessary adjustment and make the reckoning more painful and drawn out. As Mr Redwood points out, interest rates should have been raised, not lowered and government finances brought under control.”   


With hindsight, if the MPC has micro-managed less and if the government had not further expanded and extended the boom by a spending spree, than we would have the means to offset the downturn. But then again, the downturn would not be as steep in the first place, so would be easier to combat


If the British economy is not to suffer irreparable damage, the action to take now is to lay the foundations for our future prosperity. Principally, it is to learn the following.

1)                          That intervention to stimulate the economy is to be reserved for severe situations. Avoiding minor downturns will only result in a bigger bust later.

2)                          We can never know the right levels of intervention, and popular opinion will usually lead to over-reacting. Therefore, a dogmatic conservatism should be engendered in both the MPC and governments

3)                          In a boom, we governments should always run a surplus. This means that a surplus, with a falling national debt, should be viewed as the norm not a pleasant surprise for a couple of years in a generation.

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