Well no, actually. The amount of paper cash wont actually rise from the current c. £40bn mark after the MPC’s decisions to embark on quantitative easing .
The money created instead will be flooded into high street and commercial banks in an attempt to get them lending once again – “back at 2007 levels” if you believe our PM. Which you shouldn’t.
Essentially, in spite of what some on the MPC have argued – that the transition mechanism of monetary policy is broken – they today decided that inflation in Britain will soon fall below 2 per cent. It may even go negative. So:
Accordingly, the Committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term.
Is this right? The fact is that nobody knows. When it comes to monetary policy, my finance lecturer likes to use the analogy of pulling a brick on a string. You pull and pull, the rope goes slack but nothing happens. Then, suddenly, almost unexpectedly, it moves.
So, although we might see some action as the recession wears on, these incessant rate cuts – and flooding the market with liquidity – is unlikely to have much influence on banks “in the medium term”.
The reason is simple. The banks like to make money and with rates at 1 per cent they can’t, be it charging or giving interest. Nor can they at 0.5 per cent. So they stop reducing their rates, even as the Bank of England’s fall. Anything lower than, say 2.5 per cent, isn’t going to make a jot of difference for mortgage debtors, because the banks will just cap their losses.
In the medium term, for qualitative easing, I would suggest banks use some of this to readdress their tier one capital ratios and ensure that they actually have a sound basis upon which to lend money as the market corrects.
Banks shouldn’t lend willy nilly, as the treasury would like. They should use QE as some pseudo-rights issue, as an injection of capital to sure themselves up. After all, what got them into this mess if it wasn’t lending?
March 6, 2009 at 12:14 am
The thinking that ’shoring up the banking system’ will restore economic growth is misguided.
Yes, the tightening up of credit was a major cause in the recession. But loosening it will not provide the major kick start required.
Rather then pathetic fiscal and the now traction-less monetary policy efforts, We need something more along the lines of a Keynesian expansionary prescription. British infrastructure has been crying out for investment for years, now is the time.