cod'ead wrote:
Considering the almost negative impact that QE has had so far, dropping that money from the sky would have produced a far greater stimulus to the economy. The only problem being, it would be us plebs, who tend to spend a far greater percentage of our income in the local economy, would have received some of it. As opposed to the already wealthy, who tend to salt their money away in offshore havens.
I agree that really there needs to be much more imagination in monetary policy.
On QE however I think we were right to pursue it and I'm suspicious of the lobby that attack it, especially the recent line of attack that "most of the benefits of QE have accrued to the rich". The rich didn't want QE they wanted monetary policy to be tightened so interest rates would rise, as they are net savers. It suits them to get people to think it is a policy that benefits them at the expense of the poor, so they can get a reversal of monetary policy that really would benefit them at the expense of the poor.
The stimulus effect of QE has not worked as well as hoped because banks are not lending. It is supposed to stimulate the economy by getting lending flowing for business investment. The BofE buys government bonds off banks and pays for them with cash, so this changes the composition of whats on banks balance sheets by having fewer illiquid assets and more cash. As cash doesn't pay interest unless its lent, you expect the banks to lend that out. But the banks are just hoarding cash reserves, partly as that makes their balance sheets look better so they can justify paying out bigger bonuses, but also it does insulate them against cash shortages if there is another banking crisis and the banks are not unreasonable in fearing that risk given the fragility of the Eurozone.
However whilst this stimulus effect has not really worked, QE has had two positive effects. One it has meant there is always a big buyer of UK government bonds, which has kept the rate of interest on those bonds low and so reduced UK government borrowing costs. That in turn means savers look for alternatives to UK government bonds so they chase other private sector assets and that pushes the demand for those up as well, which keeps generally borrowing costs low and also keeps the value of private assets high because of high demand. This is the point that has been picked up in the attacks on 'most of the gains have gone to the rich' but it is an important point. It has kept asset prices high, which has maintained the value of things like pension funds and also savings funds for small scale savers. But obviously those with more assets gain more hence the rich have gained more. BUT without this effect from QE, though those with more assets may have had more to lose in absolute terms, a slump in asset prices would expose those with fewer and less diverse assets much more, especially those coming close to retirement.
Mervyn King is a decent bloke who has resisted lobbying from the rich to push up interest rates when inflation was high, also importantly he gets the fact that the economic problems today are global and you need international action to redress the balances of some countries being large net exporters and some being large net importers, King has been banging this drum for a while but he gets ignored. The downside with King is he is not really very imaginative, he is a good man but safe pair of hands. He won't really think outside the box and use more unconventional monetary policy to try and make things happen.
I actually think both the front runners for the BofE, Adair Turner and Gus O'Donnell, would be good choices, it's also a good sign that the banks don't like either of them. Turner would be willing to shake things up with unconventional ideas and also he was the guy who said the UK banking sector was too large and most of it was overpaid and socially useless - a break from the standard line that it is crucial for the UK economy, great tax receipts etc. As for G O'D the main charge against him was he was "New Labours Man" when he was Cabinet Secretary and head of the Civil Service, he gets demonised in the Tory press as being responsible for wrecking the country etc etc which is another sign that they are worried he would not be easy to capture by vested interests. Since leaving the Civil Service and being free to speak out he has been calling for the top priority being the rich to actually pay their taxes, although he can't influence that as BofE governor it shows what side he is on. Another thing I like about him is he is a pretty normal bloke and not up his own backside like a lot of these guys at the high end of finance.