Adam Posen, a new member of the Bank of England’s monetary policy committee is getting attention for a speech he gave last night in which he warned of a douple-dip recession.
Independent: Most disturbingly, he drew a parallel between the Bank’s current efforts and those by the Bank of Japan in the early 1990s, which were ineffective.
Mr Posen, an independent external member of the committe, said: “The banking system must be largely fixed before the macro-economic stimulus is needed to be withdrawn”.
He cast doubt on how rapidly that would happen, warning: “The alternative is likely to result in a still-born recovery, a double-dip (though less severe) recession, and/or persistently slow growth.”
Posen cited charts like this one, suggesting a failure of expansionist monetary policy (quantitative easing, etc.) to produce anything but deflation (as measured by the CPI).
Says Posen (via FT Alphaville):
I am not trying to prove with academic rigour (which these charts admittedly do not attain) that money is endogenous or some other fundamental concept. What I am trying to do is make the practical point that there is no evidence from relevant periods of UK or other major economies’ economic history that QE will result in high or sustained inflation. That conclusion is robust to more intensive econometric investigation of the available data. That conclusion is also supported by evidence from the period of QE in Japan earlier this decade which is the closest parallel to the present situation and the QE policy pursued by the Bank of England this year. Thus, high inflation is not what we should be worrying about.
He goes on to worry about the lack of available credit in England once the economy turns up, though we think he overstates the ability of the US Fed to solve the problem.
I am concerned because the financial system in the UK does not seem to have a spare tire for the provision of capital to non-financial businesses when the banking system has popped a leak. QE puts this unfortunate fact into clear relief. Other central banks were able to buy a wide range of assets from the private sector, under the heading of ‘credit easing,’ as described in Bernanke (2009), to good effect.12 The Bank of England, prior to my joining the MPC, decided to purchase only gilts (essentially, being 95%+ of purchases) under the QE program. One of the primary reasons given for so doing was the relative thinness of UK markets for corporate bonds, commercial paper, and other corporate securities issued by non-banks. I appreciate the constraint, but that limitation on QE reveals a major long-term structural problem in UK financial markets which could be of potential harm as the UK economy begins to recover.
Here’s the full speech: