The case for more quantitative easing

We all know that Adam Posen wants more quantitative easing, so the bottom line of his latest call for monetary stimulus is not surprising.

But some of the arguments that the external Bank of England Monetary Policy Committee member uses in his Reuters article are interesting.

Posen addresses some of the criticisms of QE, in particular the argument that the financial system just soaks up the money from the central bank and does not lend it out:

“Yes, inadequately restructured financial systems and real estate markets do inhibit the transmission of monetary stimulus by whatever means, as well as constraining growth directly…Were elected governments to undertake the desirable reform of banks and resolution of real estate overhangs, central bank provision of liquidity would ease the uptake of risky lending that followed — with positive feedback on the effectiveness of monetary policy in turn.”

What he seems to be saying here is that governments could make QE much more effective by cleaning up bank balance sheets and writing off mortgage debt. There is an echo here of Christine Lagarde’s call for “more aggressive principal reduction programs for [US] homeowners” at the weekend.

Posen also argues that spending cuts across the developed world make QE not only desirable, but essential:

“Monetary policy in the G7 has to take as given that the major economies will undertake fiscal contraction at an average annual rate above 1.5 percent of GDP for the next couple of years — and when integrated economies simultaneously move fiscal policy in the same direction, the multipliers on that policy increase.”

And what happens if more QE isn’t delivered?

“Insufficient monetary stimulus, let alone premature tightening, makes fiscal and financial problems worse, and raises prospects for dangerous political reaction to policy failure.”

Powerful words. We shall discover next week whether any of Posen’s MPC colleagues are persuaded by them.

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• crashtestmonkey

  More QE = higher inflation. Inflation = theft of your money.

  Higher inflation = less money to spend = further economic decline.

  These idiots have had three years to stimulate growth and have achieved a paltry 0.2%. QE and QE2 did nothing but line the pockets of the banks. We need to keep the money away from the banks by cutting taxes to keep it in our pockets to spend in the economy. You can’t borrow your way out of recession the US has proven this with trillions in stimulus but economic contraction.

  Don’t believe a word they say.

• bishbashbong

  Ben, stop pretending you know what you are talking about.

• Jake_K

  Agreed – The only case for more quantitative easing is that some pensioners will die before their purchasing power gets inflated so horrifically that they are left under subsistence level. 

  Why would you listen to someone who looks so much like Comic Book Guy from The Simpsons anyway (Posen, not Chu)?

  Anyway, there’s a simple solution - cover yourselves by loading up on index-linked bond funds.

• they_r_watching

  More QE, that’s worked wonders so far!

  Cheers Indy, this was the reminder I needed to buy some more gold & silver, the only true form of currency; not this fiat nonsense of which every form for nearly 1000 years has failed.

• http://nemoinsula.wordpress.com KlingonOffTheStarboardBow

  HA, HA!!! So, you want to print and spend more “money”? Sometime the roundabout has to stop. It’s like putting vasoline on a melanoma – just delaying (if that) the inevitable.

  Of course, the Quantitative Easers benefit, since they continue to get their vast salaries and benefits for a tad longer, and with any luck before the economy implodes they’ll be off with a vast index-linked pension. If they have any sense (doubtful) they’ll insist on it being paid in Swiss francs – or indeed gold – except that Gordon Brown sold most of ours.

  Borrowing money is fine as an emergency stimulus to the economy, but you CAN’T keep doing it FOR EVER and we’ve ALREADY done it several times. Brown of course did it ALL the time. And besides, what they borrow is mostly used for CURRENT EXPENDITURE, not capital projects – which at least makes sense and is labour-intensive.

  Idiots ……

  PS “prospects for dangerous political reaction to policy failure.”

  What is he talking about? The people getting furious and forcing some major changes? Revolution? BRING IT ON ….. at present we are in the grip of a hardly-democratic political system and a load of bankers and almost unaccountable financial structures. Something has to give, and – the WORST of it is – this crisis is going to get a LOT worse before things improve.