Blimpish || a Tory

Chris Dillow helps Charles Bean with what he should’ve said about quantitative easing – and to dispel some of the myths around it, as it is fundamentally only a different means of adding to the money supply.

Here’s what I don’t get about the Bank’s position (or is it the Government’s position?) right now: why not initiate a substantial quantitative easing now (or even, a month or two ago), of a few tens of billions of pounds?  Why wait until rates are already down near zero, and it’s seen as a desperate measure?

The most common explanation as to why they won’t do it seems to me to make the case.  The explanation is the one Chris links to – the fear that any step towards easing will trigger a crisis of confidence, causing capital flight in fear of hyperinflation.  But surely, lurching into quantitative easing as a desperate act is more likely to do that than a planned and declared intervention?

Doing it in a planned way could also be shored up by explicit commitments against deficit monetisation (best backed by a clear plan for fiscal consolidation in the medium term, unlikely though it is) and to a price-level target over the next five years (more suited to managing expectations in a highly uncertain environment).

Significant quantitative easing before interest rates hit zero might trigger a bit of inflation, but at least the relative changes in interest rates needed to counter this would then be more modest (2% to 5% is less drastic than 0% to 5%).  If interest rates are already at zero and quantitative easing is used as a desperate measure, there must be some question over the credibility of the Bank in raising interest rates to choke off any inflation amidst recovery?  Better to take the decisive action sooner and deal with its potential downsides in an orderly way, or so it seems to me.

Over the past few decades, we’ve become less and less trusting of each other, living more and more apart.  How many of us really know our next-door neighbours?  How able are we to strike up a conversation with a stranger?  The causes of this are probably many, and some of them might be good things in other ways – more multiculturalism, more careerism, fading socal hierarchy.

But it seems to me fairly obvious that since the homogeneity (warm bath or stifling hell, whichever’s your poison) of the 1950s, we now have a much more isolated, anonymous, fissiparous society.  It’s not that we distrust each other; it’s just that we don’t really trust each other either?

And yet, the super-smart people being paid millions of pounds to run our banks in this new world thought that it was OK to lend sums worth several times earnings to pay more than 100% of a house’s value, and even to allow earnings to be self-declared.  They invested in securities which represented other institutions lending to those kinds of purchases, without a thought to what their exact composition might be, just because it was another bank offering them for sale.

Isn’t it a bit funny that, just as we’ve all stopped trusting people in general as much as we used to, banks went in completely the opposite direction?  Back in the 1950s, they were famously closed institutions: in a world where people had a common culture and experience with which to understand each other, banks just didn’t lend unless they were absolutely sure.  By the late 1990s, anybody who’d previously paid back a credit card bill but had only vague work history and vague plans for the future could get an advance.

Just sayin’.

As the Spectator asks…  my BSc.-level prejudices on display.

(more…)

Oliver Kamm quite rightly gives Alex Singleton a firm thwack for his advocacy of a return to the gold standard.  He doesn’t even mention the fact that

• it’d be extremely unstable if only Sterling were placed on gold (its self-correcting mechanisms work best through trade, and the gold price would be all over the place, making the price level follow it);
• it’s not likely there’s enough gold to provide enough in reserves necessary for the developed economies and fulfil other valuable uses without sending its price absolutely sky high; 
• if the world gold supply doesn’t expand as fast the world’s gold-backed economy, the (fixed) price will have to rise again, which means deflation deflation, which will hit wage rigidities and create unemployment (as it did in 1873-1896 Long Depression); and
• holding enough gold to ensure convertibility carries a not insignificant resource cost – not just because gold pays no interest, but also because of the rise in the cost of gold losing opportunities for its other use.

(I’m surprised by Kamm’s statement that “a central bank cannot both maintain convertibility of the currency into gold and act as lender of last resort to the banking system”; surely the idea of the LOLR function comes to us from Bagehot, writing in 1873, the height of the classical gold standard.  The 1844 Act, although regulating currency issue, included reserve powers for its own suspension.)

(more…)

David Cameron and George Osborne are both talented men, but they really are struggling to pull together a coherent narrative on what’s wrong with the economy and what they want to be different.  Hopi Sen is right that the jumping rhetoric reflects a lack of a cogent underlying analysis.  Things have improved sufficiently to stop the drowning look the Tories seemed to be specialising in back in the autumn, but every twist in events seems only to emphasise the gaps in the Tory position.

The example Hopi points to, of Patrick Minford’s attack on the Tory position, shows the consequences of the weakness – and they’re very bad.  One of the great strengths of Cameron’s leadership has been the realisation that the Tory Party can’t win power without at least the acceptance of serious, elite opinion.  Where Hague, Duncan-Smith and Howard rested their hopes on building popular support in the lower middle classes, almost by glorying in setting themselves against elite opinion, Cameron realises that English deference makes such a strategy self-defeating.

The failure here is all the more telling because the Government’s arguments hardly stack up, but the Tories’ seeming inability to find traction is letting those arguments through almost by default.  There are after all economists out there like Minford who do have criticisms of the Government; but unless the Tories can find some consensus with them.  After all, partly because of the City and partly because the Labour Party pretty much didn’t do serious economics at all back in the 1980s, there are not a few respected economists who will at least fellow-travel with the Tories.

(more…)

It has become fashionable to denounce opponents to your own preferred recession-beating policy interventions as the intellectual inheritors of 1930s “do nothing” liquidationism, often simplistically cited as Austrian economics.*

The allegation made is that, like the liquidationists, those who favour doing “nothing” now do so because they read their economics as if a morality play, where recession is a necessary corrective for past excesses (e.g. Martin Wolf).  The consequence of this ascetic prescription is that not only is there nothing we can do, but there really is nothing we should do, because it’s cosmically ordained that there is to be a recession, which must run its course.  In its worst form, growth is something to be feared (it’s all a sham) and recession to be embraced – all expansion seems to be the economy overheating.

Particularly on the political Right, there is a temptation to make a virtue out of necessities we should be content to accept – to celebrate our complicity with our travails.  Here and now, I don’t think there are many who raise questions about whether some policy responses are too costly or will damage long-term growth potential because they privilege asceticism.  That said, it’s a ready defence for those advancing new and radical proposals, and it’s easier than arguing the point.

But just as for some there’s the temptation to celebrate paying for our past sins, for others there is the temptation to deny that there’s any potential downside to economic success.   (more…)

If you’re fairly familiar with economics, you should read this paper by Daron Acemoglu, because it’s really rather good.  A few extracts:

The inevitability of the business cycle: “Much of creative destruction takes place at the micro level.  But not all of it.  Many companies are large and replacement of their core businesses by new firms and new products will have aggregate implications.  Moreover, many general-purpose technologies are shared by diverse companies in different lines of business, so their failure and potential replacement by new processes will again have aggregate ramifications.”

The decay of our economic paradigm: “Forgetting the institutional foundations of markets, we mistakenly equated free markets with unregulated markets…  In hindsight, we should not be surprised that unregulated profit-seeking individuals have taken risks from which they benefit and others lose.”

Sacrificing long-term growth to deal with the recession: “Barring a complete meltdown of the global system, even with the ferocious severity of the global crisis, the possible loss of GDP for most countries is in the range of a couple of percentage points, and most of this might have been unavoidable given the overexpansion of the economy in the prior years.  In contrast, modest changes in economic growth will cumulate to much larger numbers within one decade of two.  Thus, from a policy and welfare perspective, it should be self-evident that sacrificing economic growth to deal with the current crisis is a bad option.”

Ensuring stimulus activity doesn’t impede creative destruction: “Market signals suggest that labor and capital should be reallocated away from the Detroit Big Three and highly skilled labor should be reallocated away from the financial industry towards more innovative sectors.  The latter reallocation is critically important in view of the fact that Wall Street attracted many of the best (and most ambitious) minds over the past two decades and we now realise that though these bright young minds have contributed to financial innovation, they also used their talents for devising new methods of taking large risks, the downside of which they would not bear.  Halted reallocation will also mean halted innovation.”

The whole paper’s worth a read because it focuses on the lessons for economic thinking and especially the needs to maintain the sources for long-term growth amidst all the clamour for short-term solutions.  Too much of the current debate seems predicated on the idea that minimising the effect of recession is more important than any other goal, but the consequences of such an approach are potentially lethal for our long-term economic performance.