Care, and a light touch, is needed

How much more Quantitative Easing should we have?

It seems a good thing, - increasing the cash base at ‘banks’ and thus enabling them to lend more to house buyers and businesses. After all, as supporters keep telling us, to a large extent banks have reacted to receiving the new money created by their sales of securities to the Bank of England by building up the balances which had fallen so low. Surely more QE will prompt them to lend more, as cash does not produce much in the way of interest.

The lack of lending, we are told, has not increased the money supply greatly, so monetarists are probably reassured that monetary expansion thus far does not imply an inflation danger. We could follow Alan Greenspan of the Fed, and prop everything up with monetary expansion.

There is an easy assumption that if inflation seems to be recurring, the government and Bank could merely put things into reverse.

The problem is the use of monetary policy to achieve rapid ends, in a world of uncertain confidence, rapid change, time lags in measuring the money supply and then altering it sufficiently, is fraught with difficulty. The problem is also one of deciding which indicators are important, - there may be green shoots – rising house prices, re-stocking, etc., but unemployment is likely to rise for another year at least and there will be further corporate failures and thus falling output.

Our present problems were partly caused by very low interest rates which were low because of response to falling markets. The result was debt, rising asset prices and over-valued housing, and all their accompanying problems when the reverse came. If QE is expanded we could have another asset bubble, which will require higher interest rates. This is turn could throw a delicate situation into chaos and bring any recovery to a juddering halt.

The Bank of England in applying for an expansion of EQ capacity, because of the greater depth of recession than most of us realised. Let us hope that they are very careful in using it.