Tag Archives: Memo to ECB: print money!!!

Business Sec laments Bank of England independence

31 May

Vince Cable at Leveson, on power and whom it should lie with

Since no FT journalists were at the Leveson inquiry yesterday, this off-hand comment has gone unreported. But it is interesting and further than a Secretary of State has gone before in questioning Bank of England independence.

What powers should politicians have? Are politicians by necessity too partial to decide on media ownership? Or is media ownership, and should it be, a political question? This was the line of questioning Lord Leveson put to Mr Cable. Here is Vince’s reply:

I know this is taking the conversation in a slightly different direction, but the major area where I’ve had to confront the dilemmas you describe is in terms of economic policy and whether or not the Bank of England should be an independent body, separate from politicians, determining interest rates, and I was one of the people who argued for that independence when it was established 12 years ago.

But I think what we are now discovering is that there [is] – you know, a very different economic environment, that there are very big decisions which probably are political rather than technical, which the politicians are no longer able to make, because they have handed over decision-making to an independent arbiter constrained with rules, which were devised, as you say, to reflect the policy environment of that time.

This is the furthest Vince has gone. Mr Cable has always maintained that the government should not compromise Bank of England independence: he said so in 2008, and it is Lib Dem policy.

But since the downturn, he has started questioning orthodox Bank opinion. In October 2008, he urged the Chancellor to call on the Bank to cut rates on an emergency basis. In a leaked letter to David Cameron, he called for state banks. In March, he said he was in favour of redefining the Bank of England’s mandate. He said he was “attracted by”  targeting money GDP, over the Bank’s current inflation-targeting policy. When Observer columnist Will Hutton put the benefits to him, he replied:

One of the boring things being a cabinet minister is that the following day the Guardian says, “Minister instructs Governor of Bank of England to do X or Y”. […] The economic logic you set out is impeccable, let’s leave it at that.

Vince has turned from a sensible, tutting bank clerk of an economic pundit to a free-thinking druid tied back by a Witenagemot of fusty statesmen. Day by day he is realising, like King Cnut, there is not much he can do. The tide of financial wreckage is rising by the day, and he must sit in his throne and watch. It is no wonder he has started mining the depths of economic possibility.

The market, temporarily, has failed. Banks are not lending. Shoppers are not buying. Money printing has served only to better the balance sheets of the banks. The purses of Whitehall are empty. What can be done? Create state banks? Ignore inflation targets? Anything, Mr Cable would like to say, to get banks lending to businesses again.

It is in his frustration, in his impotence, that Cable has turned on the Bank of England. I have argued before that power has drifted from the politicians in Whitehall to central bankers across the world. Cable clearly agrees. The ECB is preventing recovery in Europe and the Bank of England has more levers of control than any cash-strapped government department.

Giving the Bank independence was broadly for the best. It was the last stage in Mrs Thatcher’s quest to conquer inflation. Inflation and its volatility have come down with no cost to employment or growth. But to ignore that this came with a surrender of political power is self-delusion. King is still King.


God! Save us King!

16 Feb

Mervyn King: “Right chaps. What d’you say we chuck money out of helicopters?”

Sometimes I wonder what would happen if the government did something stark-raving nuts. If, say, RAF helicopters were ordered to sprinkle billions of banknotes all over the country. The dosh would be fresh from the printing press and would be designed to disintegrate within six months. What would actually happen? How would serious broadsheets actually react? Would they tut at or cave in to the populist glee that a shower of gold will descend from the heavens on to Burton-on-Trent?

This is the scenario painted by ex-editor of The Times Simon Jenkins. It would get consumers spending, add not one penny to the national debt and – the most brilliant thing of all – it is utterly bonkers. How workable it is, I am not sure: were fights to break out on Britain’s high streets, the tabloids would tear the coalition to shreds. It is a reasonable concern: we saw the avaricious abandon of Brits in the riots last summer. But the idea is the point: it fuels cash to the most desperate of consumers, those most likely to spend the money; it will earn huge publicity, providing grounds for a great shift in confidence; most importantly, it will get money flowing back round the system.

Helicopter money: let’s make it happen! If not this scheme, something like it. It’s either chopper lunacy or cutting madness. I have already written that we can’t spend or tax any more: fiscally-speaking, we’re stuffed. The Left’s indifference to huge debts in a monstrous free market is worrying. The Right’s zeal to cut regulations – mostly green ones, mostly fair ones – won’t come to much. No politician can save us, save Angela.

Our fate is in the hands of a King. An unelected technocrat can bring us aid or, if he so wished, ruin. It is like being under the rule of Robert Walpole. Only Mervyn King, the head of the Bank of England, can choose to print more money. He has done so already, under the guise of quantitative easing (QE), a process of buying bonds from banks, injecting money into the banking system. In so doing, we have handed riches to the banks, not the people.

If the aim was to get banks lending again, QE has failed. Last February, red-faced at the paltry levels of lending to small British businesses, David Cameron threatened to hammer banks with higher taxes if they did not lend more. Since then, banks have not lent more. They have lent less. Though banks are awash with cash, bank lending to small/medium-sized businesses has dropped month-by-month. What is the point of injecting all this moolah if the banks just sit on it?

Far better it is for this money to be given to the people in tax breaks, tax cuts, helicopter money, whatever…  We are suffering from a lack of demand. If we cannot boost demand through state spending, we should do it by making Brits spend their money. Let firms be flooded with newly-printed cash and see if it heartens them to create jobs. There is a wealth of skilled, able-bodied Brits to fill these posts. What use is it to anyone for them to be economically inactive?

I can think of no serious objection to it. If it is short-term money, no hyperinflation can result. If money is to be printed, give it to those who will put into circulation: the buyers, not the bankers. This is hardly a radical idea. It simply goes against the past 30 years of economic consensus – and which good-thinking gentleman swallows that?

There are those who thinking printing money, whatever the situation, is the road to Harare. Niall Ferguson has admitted he has these monetariphobic fears. I recall the Spectator bewailing the dizzying highs of, er, 5% hyperinflation – levels that even inflation-conqueror Maggie Thatcher would be pleased with. These fears are irrational, especially since inflation is dropping back to the region of 3%. We should be losing sleep at the lack of jobs, not price rises.

We should put aside these Teutonic-style fears. We are not Weimar Germany. We have more in common with the present despotic regime of Italy. With one exception: we can print our way out of this mess. To refuse this option is to tie ourselves as rigidly as Italy, a technocracy with no control over monetary stimulus. QE2 may not save us, but the King can.

What both sides of the debate won’t admit: we’re stuffed, there’s nothing we can do about it, and the only politician who can save us is German

30 Nov

Proponents on the Left and the Right are convinced they know a way out of this crisis.  It’s very simple, they say: jack up government spending, says the Left; hack back government red tape, says the Right: that way rainbows lie.  In their ideological fervour, they have overlooked one possibility, one possibility that neither side will dare admit: it is this: we’re stuffed.  There is no all-curing fiscal remedy.  Not one MP can save us.

Let’s consider the Left’s panacea first.  Borrowing costs are at all-time lows: 2.1%.  So we have no need to fear: borrow more to finance a large fiscal stimulus package to save us from recession.  This will (they hope) restore confidence.  The self-perpetuating fear that comes with downturns will vanish.  Businesses will look to invest, hire staff and innovate.  Growth will reduce government debt (ahem, they hope).

One question: how much will we have to borrow?  Obama opted for a $825 billion stimulus, which left unemployment hovering just below 10%.  Roosevelt didn’t drive America out of the Great Depression until his ingenious government spending plan called “World War Two”.  If we do opt for WWII-style deficits, just who will bail us out?  Last time, Britain wangled assistance from America, through Keynes’ deft negotiations, through the Marshall Plan, and through a series of IMF bail-outs.  With America bust, this option is no longer available to us.

Our debt is high already.  It is not illiberal to say this.  At 76% of GDP in 2010, government debt is forecast to peak at 86% of GDP in 2013.  The deficit is 8.8% of GDP.  We could raise state spending to levels that could lift us out of recession, but our deficit-to-GDP would reach double figures.  Why think speculators would still demand 2% in return for this?

This is the odd thing about modern Lefties.  In their nonchalance towards colossal borrowing, they have faith in the markets.  They no longer view markets as an irrational Leviathan driven by a mixture of fear, amorality, testosterone and frenzied panic.  In fact, they are intensely relaxed about handing the nation’s fate to a herd of profit-hungry speculators.  Sure, we can run up a larger deficit and get charged peanuts for it, because – so the rational argument goes – in the long run, our debt will be reduced by higher growth.  Is this socialism’s view of market forces now: rationally determined?  Hasn’t the last 30 years taught us markets react instantly, irrationally and out of fear?

It is true government debt has been higher in the past than it is now.  As Mehdi Hasan points out, between 1918 and 1963, debt-to-GDP was constantly above 100%.  “In fact,” he says, almost with glee, “in the wake of the Second World War, it had reached 252%.”  Yet, times have changed.  How can a Lefty forget the forces of deregulation and globalisation that have gathered pace since the Thatcher years?  There exist financial instruments that allow traders to bet vast quantities of money on sovereign default.  In such a climate, how can you be so blasé about WWII-style deficits?

The Right’s panacea is simple: cut back regulations!  The Spectator has offered some suggestions: make hiring and firing easier; prune planning law; get rid of EU regulations.  Steve Hilton, Cameron’s blue-sky-thinking adviser, has mooted abolishing maternity pay and all consumer rights legislation.  The effect of all this is (they hope) to restore confidence.  Businesses will see the government making these decisive moves and be free from that growth-destroying fear, so they will immediately invest, innovate and quit firing workers.  This should reduce the government debt (they hope).

Many of these moves are welcome: firms often find it hard to fire bad workers and take new ones on, due to the threat of employment tribunals and workers’ rights; many regulations simply complicate things.  There is next to no evidence all this will raise growth by even 1%.  The reason businesses won’t take on new workers, according to a Newsnight poll, is because of worries about the economy.  The proportion of businesses that cite over-regulation and/or red tape as a reason is 6%.

The problem with the economy is not that firms are inefficient – they were efficient to produce sufficient growth before the crash – the problem is one of demand.  Firms fear bad sales in the future.  How do you break this fear?  The Right earnestly believes that announcing a bonfire of regulations will.  In an instant, businessmen around the country will be wiped clean of fear; they will open the window, shout, “Halleluia!  Thank J H Christ for releasing me from this debilitating terror!  I shall now generate the jobs and output that this nation needs!  Thank the Lord for George Osborne declaring an end to those business-crushing subsections of Acts of Parliament, and thank God for my degree in economics to understand all this!

The Keynesian method to rid the economy of uncertainty in a downturn is for government to spend more.  When firms fear for the future, let the state step in to create jobs and output, letting firms take over when growth has returned and fears subsided.  Unfortunately, this option is no longer available to us.  We cannot borrow any more.  We cannot export.  We cannot cut taxes.  We cannot spend.  The eurozone will soon enter recession and then, to use a seven-letter word, we are stuffed.

Recession is not only a likely option; it is the best option.  The worst is Depression.  This will happen if the euro breaks apart messily, if a large country defaults, or if banks go into meltdown.  The only politician who can stop this speaks German.  Angela Merkel should show some decisive leadership: she could urge the ECB to start buying Italian and Spanish debt, for one.  I have an awful feeling this won’t happen.

A bailout of Italy was avoidable. Once.

9 Nov

So. Farewell then, Mr Berlusconi. You were once the joke of the eurozone. You provided much hilarity on BBC One sketch shows (see above) and panel shows (see here and here after 1:10). You survived allegations of bribery, fraud, mafia collusion and under-age sex. But even you could not survive the markets. Ciao.

Now we move from farce to tragedy. A bailout of Italy looks all but inevitable. This is worrying for two reasons: first, there is not enough cash for a bailout. Italy is the 4th largest economy in Europe; it is the 8th largest in the world. The total needed could be more than €0.6 trillion, terrifying when the current EFSF lending capacity is €0.44 trillion. Second, there is a good risk of sovereign default. It is unknown whether this will cause financial meltdown, but it could do.

It is curious, because Italian finances are not the worst in the world. Italy runs a low budget deficit; in fact, it is currently running a primary budget surplus (ie before interest payments).

What then has caused such recent terror? One answer: borrowing costs. Italian borrowing costs have reached 7.5% at the time of writing. Paying off Italian debt under such rates is unsustainable. What caused them to hit such highs? Panic. Self-perpetuating panic, I would argue. Once investors become convinced that default is likely, they demand higher and higher repayment rates. Seeing rates ever rising, seeing Italy splashed all over the front pages: this only increases the panic. So rates rise even further.

News reporters have not helped over the past week. 7%, they have said over and over again, is the rate at which Portugal, Ireland and Greece were bailed out. This is true. But is it worth repeating? Is it worth reporting, 6% is very near the figure when Greece was bailed out? Is it worth saying, at 5%, investors fear rates could rise into Greek-style territories? If we keep repeating this figure – 7%, 7%, 7% – I wonder whether or not we imbue it with some talismanic quality. For Italy is not Greece. It has different levels of debt, different inflation rates, growth levels, deficit levels; so the figure-of-no-return could well differ from 7%. Yet by convincing ourselves that it is 7%, we also convince the markets – the strange world where thinking it makes it so.

I suppose media panic is inevitable. Market panic is not. In fact, market panic could have been stopped long ago: by boldness. The European Central Bank (ECB) could have stepped forward and guaranteed to buy limitless Italian bonds. Buying bonds would act to reduce interest rates. Italian borrowing costs would fall. It would also have the side-effect of convincing markets default is unlikely. Investors would demand lower rates of return. This option looked possible in August, when the ECB vowed to “actively” buy Italian and Spanish debt. On Thursday, however, the new ECB head Mario Draghi called bond purchase plans “temporary” and “limited”.

Why the timidity? First, the ECB is not legally mandated to directly support governments. Second, dissenting voices – particularly German-sounding ones – would grow louder. These opponents fear a looser monetary policy would tempt Mediterranean governments not to sort out their budgets. There is also a deep-seated German fear of inflation, after the hyperinflation of the 1920s.

These concerns aren’t reasonable . There would still be pressure on Southern euro-zone members to sort out public finances. Legal mandates should be tossed into the wind at a time of near-financial collapse. When the prize is to lower Italian borrowing costs, so that Italy can pay back its debts and avoid a bailout, fears even of 5% “hyperinflation” are unfounded. A looser monetary policy would make exchange rates of struggling Europe more competitive. Even if printing money led to inflation, it would be welcome: inflation erodes away debt.

The reason for the inaction of the central bank can be spelled out in one word: Germany. Germany has all the power in Europe and it hates the idea of a looser monetary policy. Germany is an large exporting market bewitched by budgetary discipline. Printing money would make its exports less competitive, reward countries for profligacy and cause run-away inflation: everything Germany hates. Yet this could be the only way to avoid an Italian bailout.

I leave the last word to heroic Tory grandee, Sir Peter Tapsell:

Chancellor Merkel knows very well that it was not inflation but high unemployment which, in my lifetime, brought down the Weimar republic, and [it] will do the same for the European Union.