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.Tagged in: Adam Posen, banks, quantitative easing
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