Would not print money for a Corbyn cabinet.

The chatosphere seemed ablaze today about UK Labour Party leadership contender Jeremy Corbyn’s plans for a ‘People’s QE’.  Richard Murphy was reported as being on World At One defending it, based on its resemblance, I presume, to a ‘green QE’ plan he wrote about some time before.  [For a comprehensive demolition of that, see Frances Coppola’s blog].

There is lots wrong with Corbyn’s plan, and I don’t think shadow Chancellor Chris Leslie’s attempt to counter it really works either.

First, I dislike the populism behind the label ‘People’s QE’.  It implies there was something elitist about the QE the BoE conducted.  For sure, QE had distributional impacts.  But the counterfactual, if it had any effect at all, would have been life much worse for those that would experience the deeper recession, which, historically, has always been the poor, since it’s they who disporportionately suffer unemployment.  If we can wave a QE wand for ‘the people’, why not proclaim a ‘People’s Interest Rate Policy’ too?

Second, and more importantly, Corbyn’s plans are not being presented on monetary policy grounds only.  Any attempt to hijack the printing presses for general deficit financing, when loose money is not necessary to achieve the BoE’s mandate, will wreck monetary policy for a long time to come.  Simon Wren Lewis, who actually favours helicopter money transfers for monetary policy purposes, made this same point on Twitter [at least I read him that way].

The reason for the wreckage will be that the next time the Government fancies winning an an election by promising grand public works schemes, it will be expected that the BoE will print money to finance that too, and this will lead to more inflation, and, because this will be expected, will make it ever harder to finance expenditure this way.

Corbyn’s QE is the first step along the road to undermining the social usefulness of money, and would ultimately impoverish us.

If we were in a state of monetary policy crisis, then QE-financed something is at least worth considering, and Wren-Lewis, Lonergan and I think Portes have all supported the idea.  But that something should be as politically neutral as possible, and not a matter for the BoE.

At any rate, even in such a state, I would consider this an almost last resort.  [The very last resort being altering the institutions of money to permit substantially negative nominal interest rates].

The first resort, which Corbyn and others should be considering, is simply a slightly looser and conventionally bond-financed fiscal stance.  Together with, as I and others have urged, some institutional device to make assistance of monetary policy semi-automatic at the zero bound to interest rates.

The fact that Corbyn has not simply gone for what I describe as the first resort, even in a more accentuated and therefore left-appealing fashion, is striking, and betrays a lack of basic understanding, or a Magpie-like attraction for the radical-sounding, or both.

To amplify a point made earlier, all this is not to say that there is not a perfectly arguable case for looser fiscal policy, directed now in pursuit of public infrastructure projects.  The linchpin of that case is the fact that current real financing rates for such projects might be argued to be fortuitously low now, and future generations would lament that we did not take advantage of them.  At the same time, current public infrastructure is argued to be ailing in many respects [power generation and rail being the most obvious cases], and so social returns are high.

However, that said, this is not something that should be done in a way that involves the Bank of England directly, and nor need it be done this way.

Whether the ‘People’s QE’ will prove an electoral liability, who knows.  In my experience, QE is hard to fathom, even for senior central bankers, so it might prove catchy in the wider public debate.  But, if Mr Corbyn could be made to see that it’s unnecessary and silly, the electoral downside risk for his party, of coming to seem like financially inexpert cranks, would be avoided.

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20 Responses to Would not print money for a Corbyn cabinet.

  1. thenextwavefutures says:

    “It implies there was something elitist about the QE the BoE conducted.” Well, yes, there was. The Bank of England concluded that the main beneficiaries of its QE programme was the top 10%, who saw a significant uplift in the value of the assets.

    http://www.theguardian.com/business/2012/aug/23/britains-richest-gained-quantative-easing-bank

    “The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.”

  2. The above article claims there’s a flaw in peoples’ QE in that “Any attempt to hijack the printing presses for general deficit financing, when loose money is not necessary to achieve the BoE’s mandate, will wreck monetary policy for a long time to come.”

    Obviously if the BoE thinks (let’s say rightly) that no extra stimulus is needed, and someone hijacks the printing press and goes mad with it, then excess inflation will ensue. However, anyone who designed a peoples’ QE system that allowed that to happen would be a “silly billy” (to quote former chancellor, Denis Healey).

    For example the “print and spend” system advocated by Positive Money and the New Economics Foundation involves the BoE itself (or some similar committee of independent economists) having responsibility for inflation (as now), AND responsibility for how much is printed. I.e. the BoE decides on how much stimulus there is (which it already does, via interest rate changes). In contrast, the BoE has no say whatever on exactly what any extra money is spent to (health, education, tax cuts, etc): that’s up to politicians.

    • Tony Yates says:

      I think that PQE is an attempt to argue for money printing orthogonal to the objectives of monetary policy. You disagree?

      • Clearly Corbyn is more into sexy soundbites than setting out a coherent economic policy. But his economic advisor, Richard Murphy seems to be aware that imparting stimulus via money printing over and above the stimulus that the BoE thinks suitable would be inflationary. Murphy says (link below) “printing money is not inflationary when there is a shortage of money in the economy.”

        http://www.taxresearch.org.uk/Blog/2015/08/03/chris-leslie-has-got-corbynomics-wrong/

        So I’m claiming (not with total confidence) that Corbyn and Murphy are not being “orthogonal”.

      • Tyler says:

        Unfortunately Richard Murphy doesn’t actually use any metric to quantify how much money is in the system, or the growth/decline of such. He simply asserts there is too little as a means of justifying his PQE approach, knowing full well that what his suggestion really entails is the monetaristic printing of money – which tends to be very inflationary.

  3. “The reason for the wreckage will be that the next time the Government fancies winning an an election by promising grand public works schemes, it will be expected that the BoE will print money to finance that too, and this will lead to more inflation…” Wrong. If the BoE is so influenced by the political party in power that it does that, then by the same token it would cut interest rates just before an election as well. I.e. that’s not a criticism SPECIFICALLY of “print and spend”.

    However, one mistake Corbyn & Murphy do make (and which PM and NEF don’t) is the idea that a big chunk of intrastructure spending should be funded by new money. Problem there is that the amount of stimulus needed varies hugely from one year to the next. Thus if (to illustrate) motorway building is funded primarily from new money, then such projects will grind to a halt during years when no stimulus is needed.

  4. Nicholas Martin says:

    “The fact that Corbyn has not simply gone for what I describe as the first resort, even in a more accentuated and therefore left-appealing fashion, is striking, and betrays a lack of basic understanding, or a Magpie-like attraction for the radical-sounding, or both.”

    What you proposed would tar him with “borrow and spend”. What his advisor is proposing is of course “print and spend”, but with the “print” part conveniently obfuscated. You’re right of coruse that “print and spend’ is rather worse than “borrow & spend” (the latter might be quite reasonable), but in political and electoral terms it might be rather more useful. So Corbyn might be taking this up as simply an electorally-useful gambit (at least within the Labour leadership elections), with no intention of actually acting on it.

    • Tony Yates says:

      Fair points these.

      • Luis Enrique says:

        Fair points …. And strong enough to justify peoples QE as best achievable within political constraints?

        (Although whether a coherent and sensible version of peoples QE can be devised I am not so sure. )

      • Daniel Davies says:

        Fair? I think they’re horribly unfair points. If the Big Idea of Jeremy Corbyn is that he is going to:

        a) give up on any attempt to make an honest left wing case for taxing and spending

        b) give up on any attempt to make an honest Keynesian case for borrowing and spending (ie, taxing and spending, but in a more sensible intertemporal pattern)

        c) give up on any attempt to make an honest … not sure what to call it, but there’s an honest case to be made for saying that financial repression is a legitimate means of government financing and the inflation tax has at least some favourable characteristics as a tax.

        but

        d) carry out a sort-of Keynesian policy, the countercylical credentials of which are highly debatable, by means of a policy with inflationary consequences that are very hard to control or measure.

        … then he’s learned all the wrong lessons from Syriza. “If the people understood the policy, they wouldn’t vote for it, so I need to make it really confusing” is absolutely shitehouse politics. The attraction of Corbyn is meant to be that he’s at least a sincere politician rather than a compulsive Blair/Clinton style triangulator. Now he’s not only accepting the inevitability of deficit fetishism in British politics (ie, giving up the attempt to have an economic debate in sensible terms), but proposing a solution which basically involves baffling the public with QE jargon so they don’t realise they’re voting for it.

  5. There is of course an alternative to Central Bank (or People’s) QE and that is private banking QE. It is years since we (at theMarketsoul) last reviewed or learnt the academic underpinnings of Monetary Policy, so we will graciously concede a lack of fundamental monetary policy knowledge, should someone pick holes in our opinion:

    Before Central Banking, in essence all banking was private banking (although in the UK you have to go back over 300 years to find this scenario and in the USA the FED was created in 1913). Up until Central Banks were created risk was pooled among private investors, rather than effectively nationalised using the Central Banking mechanism. This pool of risk capital was shared among willing and able participants, who understood their investment risk and should more capital have been required, these investors, subject to the usual due diligence processes, contributed more capital when called upon.

    Part of the mechanism of ‘printing money’ or rather more accurately stated, creating more Money Supply, is the capital ratio imposed on the private banks (themselves or via the Central Bank). The higher the ratio of own capital versus leveraged (lent) capital, then lower the money supply creation opportunity and the opposite is of course true, namely lower capital ratios encourages more Money Supply creation (at higher risk factors, too). The problem is that theory and practice has diverged to such an extent that the person(s) controlling the risk appetite / management of the private banks are not the owners, hence the principal / agent problem. What we mean by this is that understanding that the creation of more money (supply), via loans through the capital ratio multiplier effect has significantly more risk attached to it, as the capital buffer to protect the private banks are impinged by defaults. Hence, under proper risk management control frameworks, this risk control is privately and more considerately monitored.

    So, what we object to is the notion that for some reason the public sector (Bank of England) is better at managing risk than the private banking sector. No, this is not the case. The only difference is that Moral Hazard still exists and that losses, rather than being borne by the private investment community is nationalised and borne by the tax-payers.

    We can’t see any Equity in such an arrangement, whatsoever especially in a ‘cold fiscal climate’ as we are currently experiencing.

    What we are really after is less public sector interference (disturbing the equilibrium seeking nature of “the market”) and more and widely held private pooled risk capital in the market, that socialises the losses at the investor level and not the more narrowly held “tax base” of one or other jurisdiction. Surely this would be a better way of protecting base erosion and profit diversion, but this is an entirely different argument altogether…

    • Tony Yates says:

      That’s a neat summary of the free banking position but I don’t believe it would be beneficial. But that’s a long and deep debate, and who knows, the new settlement technology and peer to peer lending of the future may yet overturn the current consensus.

      • We can’t (or won’t) disagree with you there, Tony, especially on the new ‘FINTECH’, other and alternative P2P lending platforms and mechanisms! Just keeping an eye on that next unseen (or undiscovered) risk horizon…

    • The Market Soul,

      I don’t find your argument very clear, but you seem to be saying that the problem with banks is that the risk managers and owners of banks are two different lots of people, who moreover, have very little contact with each other. Agreed. You also seem to advocate higher capital ratios. Almost everyone agrees with that nowadays. The only question is how high the ratio should be.

      Martin Wolf and Anat Admati say about 30%. Advocates of full reserve banking (e.g. Milton Friedman and Lawrence Kotlikoff) argue for 100%, and the beauty of that is that there is not the remotest chance of taxpayers having to rescue money lenders, which presumably will be music to your ears.

      As to deposits, those are simply lodged at the central bank: relevant monies are not loaned on so the money is not put at risk. Incidentally Positive Money and the New Economics Foundation advocate a variation on that full reserve theme.

      Also that system (inevitably as it so happens) means that private banks do not create money: only the central bank does. Money (amongst other things) is a liability of a bank which is fixed in value, inflation apart. Under full reserve, the only liability that private banks have are shares or similar, and shares are not money.

      • Dear Ralph,

        Sort of and not quite, to clarify the response.

        No, we are not advocating higher capital ratios, but were merely pointing out that under a private banking, as opposed to a central banking system, setting the capital ratios would be at the discretion of the owners of that risk capital, which of course would be at risk as it is ‘risk capital’. Depositors would have to understand the risk of depositing with these institutions too, because if there was a failure, they would lose their money too.

        If there was no central bank then (and even now) private banks do affect the supply of money as they effectively ‘create’ loans (money supply) based on the capital ratio they are allowed to maintain, or if there was no centralised regulatory authority (the Central Bank) to oversee this capital ratio, they would create money supply at their own discretion and risk appetites.

        Therefore, we were merely pointing out that there is an alternative to Central Bank QE, but because we have not had a purely private banking system for so long, we have effectively ‘forgotten the collective memory’ of such a system.

        Remember, this is pure conjecture and theorising. The points being:

        You do not have a have a Central Bank, as private banks can also via the market, pricing and risk appetite mechanisms create and affect the Money Supply. QE is just the Central Bank’s accepted mechanism in the absence of other tools, such as setting the interest rate. We know we are hugely simplifying the argument, which is just to suggest an alternative point of view.

        Hope this addresses the gaps in the original statement we made.

  6. joetaylor41 says:

    Suggest this article should be considered http://positivemoney.org/2015/08/shadow-chancellor-look-case-strategic-qe/
    It includes:
    First and foremost, it’s important to realise that this idea has the backing of many mainstream economists. Among those calling for a different form of quantitative easing is Ben Bernanke, former Chairman of the US Federal Reserve and Lord Adair Turner, former Chairman of the UK’s Financial Services Authority.

  7. Your arguments are reasonable, but I do think you might be in danger of getting the politics and the tone of your rhetoric wrong. The kind of technocratic economics centred policy making you favour does not have a political home but I think you might find that Corbyn is at worst, no more ridiculous than the Tories and Labour’s more centrist varieties.

    First off, the populist language. It’s a reasonable point you make, but I’m not sure it’s all that inflammatory, I’d certainly say it’s a good deal less inflammatory than the language that is often used when talking about immigration or welfare for example. I suspect the central banker in you gets somewhat annoyed at what you see as a negative characterisation of QE, I can tell you that not every Corbyn supporter thinks that way. An unfortunate side effect of Corbyn’s popularity is that it’s brought in quite a lot of angry, vocal but not particularly well informed support.

    In terms of policy, what I’d like to see is a government that is willing to expand it’s spending up to the point that inflation starts to edge up towards it’s target and the BoE needs to start raising rates, the money for this could come from plain old borrowing. I suspect you’d like to see something similar, possibly combines with a raising of the inflation target (I also think this would be a good idea). Corbyn does not offer this, but neither does anyone else; the Tories are tightening and Labour’s centrists seem to just bang on about some imaginary quality of “economic credibility”.

    I personally think that an expansionary fiscal policy is just about the best thing we could be doing in terms of economic policy right now and the only person who seems to be going near the subject is Jeremy Corbyn. QE for the people is gimmicky and I disagree with it for the reasons Frances Coppola laid out a while back. I personally think that Simon Wren-Lewis’ democratic helicopter money sounds like the best implementation of this kind of idea and could be a useful new tool in cases where the economy looks stuck on the ZLB, I also think that this kind of idea might be useful in impressing upon the general public the idea that we should really not let worries over debt force us into making stupid fiscal policy decisions.

    Overall then, while there is plenty wrong with Corbynomics I’d like to suggest it would be better viewed as a set of policy proposals that are flawed and in need of improvement rather than something that can be dismissed as something obviously ridiculous.

  8. The Market Soul,

    There is a problem with your idea that “capital ratios would be at the discretion of the owners of that risk capital”. It’s that those “owners” given the choice will reduce capital ratios to absurdly low levels (exactly what they did in the decades leading up to 2007/8) in the full knowledge that if it all goes belly up, government comes to their rescue, or at least to the rescue of depositors.

    Re your point that “Depositors would have to understand the risk of depositing with these institutions..”, the problem there is much the same as above: i.e. depositors just plain simple refuse accept that risk. That is, if a bank went bust in the UK in 2015 and government didn’t rescue depositors there’d be riots.

    The best solution to that dilemma, according to advocates of full reserve banking like me, is to SEPARATE deposits which are supposed to be totally safe from money which relevant individuals want to be loaned on or invested, and where they are explictly given no government guarantees.

    Re your point that you are “merely pointing out that there is an alternative to Central Bank QE”, that’s a fair enough point to make. I agree that if there is no central bank, then private banks perform a useful service. However, those days are long gone. We now do have central banks, thus the question arises as to what functions previously performed by private banks should be terminated.

  9. Peter says:

    Hi All,

    Slightly novice economist here (be gentle), but I’ve some genuine q’s that leave me slightly puzzled.

    As I understand it, existing QE asset purchases were *meant* to be unwound at some point. Is it right to think that, given you’d have no net increase in the money supply, you could in theory taper and substitute some form of PQE to (gradually) replace existing initiatives?

    I also wonder here about the direct investment in increasing capacity, which would in principle not animate the inflation demons. In particular, whereas existing QE had the effect of buttressing inflation in areas like housing, could more direct investment in the supply of housing stock not dodge that bullet? Or, probably more importantly, in creating capacity strategically in markets like green tech? It seems to me that the most important issue is how/where the money is spent.

    Last q. I’m wary of the possibility that any of these moves would still send self-perpetuating inflationary ‘signals’, as some of the press have suggested. So what can be done to avoid this as above? If this is genuinely dependent on the mood of markets and consumers, do we run into the same sort arguments confronting arguments looser fiscal policy i.e. you can’t have this, markets won’t see you as credible?

    Cheers in advance and apologies for the non-expert q’s.

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