Thursday, 19 July 2012

Quantitative Wheezing

Division within the monetary policy committee (MPC) demonstrates the need for a different sort of stimulus

Counter factual arguments are a policy makers dream. Regardless of how dire the current state of affairs may be, just imagine if such assertive action had not been taken. This is the argument made in favour of another stint of monetary stimulus. Like the policy itself, the argument suffers from diminishing returns.

The Bank of England’s (BoE) statisticians reckon that the first round of quantitative easing (QE) raised GDP by 2%. Conveniently for the bank, we will never know if this is true, it is merely a complicated guess relative to a counter factual argument of how things might have been.

Still, there are two pieces of simple data not premised on econometric modelling, which should make one suspicious of the effectiveness of the latest round of QE. Since the BoE’s first round of stimulus back in 2009, bank reserves are up 58%. Yet lending has barely risen, up a paltry 0.2%. If ever QE did work, it was never reflected in increased lending to businesses.

This opinion is not limited to the blogosphere. Spencer Dale, the BoE chief economist is sceptical of another dose of QE, voting against the latest £50bn injection citing that the “conditions are not right” for more printing. Indeed the MPC was divided on the issue, with several key figures voting against the measure.

Two things can be gleaned from this. Firstly, that like everyone else, the BoE does not know what the correct course of action is to avert recession. Secondly, without confidence, banks will not lend to businesses no matter how much cash they are given.

The banks, fragile and anxious, borrow cheaply from the UK government; the UK government, delicate and nervous, receives cheap financing from the banks. The analogy of two drunks being propped up by one another is depressingly apt.

Osborne and Hester?
Stop Wheezing, start fracking

Fracking is the bane of environmentalists everywhere; it could be a boon for the UK’s economy and energy mix. Regulation prevents effective exploration of this lucrative market. It should go ahead with vigour. If the country is serious about rebalancing the economy, then this high tech engineering industry cannot be neglected.

Shale gas exploration could cause pollution, it may underwhelm, most importantly; it may fail to spur the economy.

Still, fortunately for your correspondent, the counterfactual, of how awful things would have been without such bold measures, can always be used in defence. 

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