Quantitative easing: we need another Lawson
Last Thursday I was on Reuters discussing the conclusions of the MPC meeting as the information was being announced to the markets. The interviewer kept asking questions such as: “It looks like it will be £75bn – is that the right number?”. I tried to explain, more than once, that I was not qualified to comment on whether £100bn or £80bn was the right number; what is important is the framework of thinking of the Bank. In my view, given that interest rates are no longer a useful policy tool, the Bank should be trying to get close to its inflation target by monitoring the amount of broad money, in the context of the special factors which we know make the money numbers difficult to intepret (inter-bank activity, the velocity of circulation etc). QE should simply be about trying to ensure that we do not get a contraction, or a too-rapid expansion, of the money supply. This means that mopping up the money at the appropriate time is just as important as making sure that appropriate measures of money supply do not drop.
I tried to stress in the Reuters interview that my main concern was that I feared that there was no rigorous framework of thinking at the Bank or the Treasury. Officials seem to think that this is a serious recession, therefore we must throw everything at it – and that must include printing money. That is the way to poor execution and a serious bout of inflation. As I went on to say, we need a Lawson or an Issing to draw up a framework that communicates just why the central bank is doing this, how it will know that it has done enough and when it should start mopping things up. QE is not new (at least not to those of us who recognise that history did not begin in 1997). The central bank can set interest rates and let money supply look after itself. Alternatively, it can set a framework for managing monetary aggregates and let interest rates set themselves. But, to maintain confidence in the inflation target, the Bank should explain why it is doing what it is doing. If it does not, then people will begin to wonder…