« The Desperation of Quantitative Easing »

"Quantitative easing (QE)" is an ugly name for an important task: the need to make monetary policy effective when interest rates are close to zero. The world's leading central banks, including the Bank of England, have taken such actions. But is UK policy working? Yes, but not quite enough. The argument about quantitative easing is polarized: some critics wail about inflationary "money printing"; others complain that too little attention is paid to the flow of credit. Of the two camps, the latter is the more persuasive. At its simplest, as Charles Bean, the Bank's deputy governor, has explained, the Bank uses newly created money to purchase assets. Hitherto, the UK's QE has amounted to £200bn ($274bn), mainly used to purchase government bonds. The new money, in turn, ends up as bank reserves at the Bank. ... As Mr. Wilkes also argues, in today's exceptional circumstances, the Bank could usefully buttress its inflation target with a medium-term objective for nominal demand. Then, if QE has to be restarted, the Bank could use such a framework to explain why. Desperate times need desperate measures. The times are not over. Nor, therefore, are the measures. – Financial Times

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Dominant Social Theme: It's a really good idea and it works.

Free-Market Analysis: This editorial in the Financial Times from March 7, 2010, excerpted above, is a tiny little yelp from the power elite, in our opinion. Maybe, just maybe, the ruckus over so much central bank money printing is beginning to reach the ears of those who actually create the money – even in the rarified heights of British high finance. Here's the telling phrase: "The argument about quantitative easing is polarized: some critics wail about inflationary 'money printing'; others complain that too little attention is paid to the flow of credit."

The critics who rail about "money printing" are actually those who use free-market Austrian analysis of the type for which economist FA Hayek won a "Nobel" prize. The point of the article, so far as we can tell, is to promote the idea that quantitative easing helps bolster credit liquidity. Of course this is a non-sequitur in terms of answering the argument as to whether or not injecting massive amounts of fiat money into the West's (Britain's) financial system eventually creates massive price inflation. History seems to show that it does.

The Financial Times fears "desperate times" and states "the times are not over." It seems to us, in fact, that this is actually a fairly strong statement in defense of quantitative easing. It is also noteworthy for another reason. It seems to indicate a certain level of defensiveness by a main mouthpiece of the British banking establishment.

That the Financial Times would seek to defend quantitative easing in an apparently unsigned editorial is a remarkable event from our point of view. Only a few decades ago the phrase might have been used, but the idea that such a policy would ever become controversial would likely have seemed far-fetched. But almost everything concerned with central banking these days attracts argument. The Financial Times is not alone in noticing it. Policymakers at the Bank of England seem to be backing away from QE as fast as they can, claiming that more stimulus will not be needed. Here's an excerpt from a recent Dow Jones newswire post:

Bank of England policymakers hope they won't have to add more stimulus to get the U.K. economy back on track, assuming there aren't any further shocks, Monetary Policy Committee member Adam Posen said Tuesday. Speaking on Sky television, Posen said if an additional boost were necessary, an extension of the BOE's quantitative easing asset buying program would be the most likely outcome, but it would depend on the nature of the problem.

The BOE launched the policy, through which it has bought GBP200 billion in mostly U.K. government bonds with freshly created central bank money, last March, having slashed its key interest rate to an all-time low of 0.5%. "We hope we've done it," Posen said, when asked whether the MPC would need to extend the program. If inflation and output growth follow the path the MPC has projected, "in that case, there's no need for more QE. It's if something negative happens to the economy again, then we may have to do something," he said.



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