Quantitative Easing

 

Now and again we hear some news and wonder if we are dreaming.  The wonderful term, quantitative easing, had just started to appear in the media, presumably to desensitise the public when it actually happened - and now it is reality.  We wake up and it is still true.  It means introducing more money into the economy, apparently out of thin air.  These days, we might speculate as to how much of this is printed and how much is created electronically.  Either way, it seems reasonable to expect that introducing this much new money could devalue the money that is already in the economy.  We are not comparable with Zimbabwe but that country illustrates the extremes of a devalued currency.

Creating new money is typically a route to take when interest rates can do no more.  Our central bank rate is now close to zero in an effort to stimulate renewed lending to follow the irresponsible lending that got us into our dire economic situation.  A problem with such low interest rates is that they deter new consumer savings and can even encourage withdrawals.  This effect reduces the capital that is available to lend out regardless of attractive borrowing rates.

It is an interesting feature of this recession that industry and investors with the funds to help the economy could have got their fingers burnt with a whole range of different asset classes.  There are low returns on cash and high risks associated with the stock market.  Property prices have plummeted and we have seen major exchange rate variations.  Oil prices have taken an incredible path and it was quite easy for industry to buy at the wrong rate.  The credit ratings of some organisations might raise the risk profile of corporate bonds.

We are right to acknowledge that we are in a worldwide recession.  It is just that aspects of the problem seem to be worse here and that fact needs some acknowledgement from government.  People can accept that governments make mistakes during three terms in office but some recognition of this from the top goes a long way to building confidence in our future.  The key to improvement and avoiding mistakes in the future is surely a degree of self-awareness and an identification of what went wrong.

There were gaps in financial regulation and there was lending at absurd income multiples.  Some financial institutions were offering such risky products, complex derivatives and the like, that their business models looked more like those of casinos.  It is ironic that the government did not proceed with more casinos through legislation but enabled a growth in financial services gambling by not keeping its eye on the ball.  Ultimately the government has a duty to ensure proper financial regulation  through whatever agencies it establishes.  Its failure to adequately do so warrants an apology - from the top.

Councillor Bob Lanzer, Leader of Crawley Borough Council
11th March 2009