9th February 2012
To date, quantitative easing has focused on the gilt market, but Posen has been on the record suggesting that it should be extended to other assets. The rationale is: "(Quantitative easing) takes the assets from financial services firms, which will then invest in other assets like corporate debt, lowering interest rates and boosting borrowing. If the Bank of England bought corporate bonds itself, if could directly lower those borrowing costs – though difficulties may come in deciding which firms' debt to buy.
Posen is quoted as saying: "There is too much of a fear of a public role in creating financial infrastructure. It would not be the end of the world if the MPC were, as part of the asset purchases, to buy things other than gilts."
Simon Ward, chief economist at Henderson, agrees that a shift in the focus of quantitative easing may be welcome: "The positive monetary impact of QE has been offset by bank disposals of non-domestic assets, probably in response to funding difficulties and regulatory pressure to boost capital ratios. Rather than force feed more cash into the gilt market, the Bank of England should offer ECB-style longer-term liquidity support to stem further deleveraging."
Andrew Lilico highlights the problems of some of the QE alternatives on right-wing blog Conservative Home, notably with the extension of QE to corporate bond purchases: "The most economically-neutral way to increase the volume of bank deposits is to purchase government bonds in second-hand bond markets. If the Bank were to intervene in specific credit markets, that would create significant distortions – lending would migrate to those markets / firms, and the Bank would be engaged in "picking winners". Furthermore, how well placed would the Bank be to assess true credit risk in those markets?"
Lilico suggests two more strategies that might generate the hoped-for effect: "One form credit easing could take would have much the same goal. Since the banks remain distressed (through some combination of past losses, future outlook, and regulatory response), the government could circumvent the legacy banks – go "beyond the banks" – and provide new resources for lending. This might be done generally, or focus upon particular classes of borrower believed to be poorly served by the legacy banks, e.g. small and medium-sized enterprises." His final strategy is to shift the structure of corporate debt to include more capital markets financing for companies.
There is a continued perception that quantitative easing simply acts to prop up the banks; indlovubill is typical when he says on the Huffington Post: "The newly printed money is used to buy government bonds back from the banks. the banks therefore have a lot of cash to play with and the theory is the banks then lend that money to businesses resultant of which the economy gets moving again. Of course what really happens the bankers fritter the money away giving themselves huge bonuses and gambling what is in effect our money on the international exchanges."
This moral argument would be addressed by the idea of ‘green quantitative easing'. Caroline Lucas, Green MP for Brighton and Hove has vigorously endorsed this theory, originally established by the Green New Deal Group. It calls for the cash currently being injected into quantitative easing instead to be shifted towards green investment projects to support renewable energy and energy efficiency projects. Lucas argues: "Rather than handing the money over to the banks, who then sit on it, green QE would put money into the wider economy – creating thousands of new jobs, improving energy security and tackling climate change at the same time."
It is a seductive prospect, the group claim that a £10 billion investment in green quantitative easing invested in the energy efficiency sector could create 60,000 jobs (or 300,000 person-years of employment) while also reducing emissions by a further 3.96MtCO2e each year. They suggest it could also create public savings of £4.5 billion over five years in reduced benefits and increased tax intake alone.
However, in all these alternative solutions, a certain John Blunt should act as a brake. Creative solutions to a government debt crisis are nothing new. Giles Milton outlines the history of the South Sea bubble in 1720, when John Blunt offered to take over Britain's entire national debt with only one condition attached. For every £100 of debt he assumed, Blunt demanded the right to issue £100 of new stock for the South Sea Company. Of course, the outcome was disastrous, a huge pyramid scheme that saw thousands of families lose their life savings.
Government bond and equity markets have grown used to depending on quantitative easing, but if this latest round proves ineffective in stimulating the desired level of growth, policymakers may have to turn to more innovative solutions. There are plenty of possible alternatives, but perhaps they should bear John Blunt in mind before becoming too creative.
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