Dillow defends QE

I read virtually everything Chris Dillow writes. his blog is excellent and I find it very useful to see the marxist view of the world laid out so well, even though I disagree with most of it and comment to that effect from time to time.

However, today's' post is worthy of a reply:

It starts "I fear that a hatred for the government has clouded the minds of some of its critics. Guido and the Devil’s Kitchen are upset by the proposal in the Banking Bill to abolish the obligation upon the Bank of England to produce a weekly balance sheet."

Well, both have a history of being against this QE thing for a few weeks now. In fact no one even thought this an idea of any merit to even be discussed until the Government ran out of policy options very recently.

Then the main refutations of anti-QE position:

1. The idea that “printing money” is something sinister associated with banana republics is just gibber. As Willem Buiter says, printing money is what all central banks do.

Um, I think it is the amount of money printed that matters and whether it is unsterilised or not. This is OK as far a being pedantic goes, but is not really a defence.

2. The Bank couldn’t print money in secret even if it wanted. Quantitative easing (QE) works by the Bank buying assets from commercial banks - and giving them money in exchange. It must, therefore, announce its intentions to do so to banks, and therefore the rest of us.

Without controls on what they do, the Bank can do anything. In fact it could buy assets, reduce their value to zero and make them disappear along with the loan created to buy them(in a very roundabout way I happen to think this WILL actually happen). Without control, we are powerless to see what is going on inside. Also the Treasury will have a lot more power and we all know that really is opaque - our view of the BOE is a crucial window in the coming months. If there is no problem wit this, then why are they making this change to the banking bill now? (The only reasonable explanation could be the costs of producing the data are considered excessive or that the data is actually not very accurate - the first is remote given how much statistical crunching power the Bank has, the second is just scary).

3. There’s little point doing QE in private. The point of QE is to prevent severe deflation. This is best done by raising inflation expectations, which in turn is best achieved by making as much of a song and dance about printing money as possible. Indeed, in theory it’s possible that the announcement of QE alone would be sufficient to raise inflation.

QE is to prevent severe deflation. Well, then all is fine, we are only predicted to have -1% inflation by Q3 2009. No need for QE then. However, QE could also be used to bail out the banks and get them lending, I don't see why this would have to be public if it worked, especially if the said banks are nationalised when it occurs.

4. Even if there’s no weekly balance sheet released, it’s quite likely that the data contained in it will be released elsewhere, as it is now - for example, table B1.1.1 of Bankstats.

So why not just release it every week. Why change this in an act of Parliament? I hope all the data is published.

5. The notion that the weekly data is a “major control” over the Bank is pish. The current data show that the Bank’s balance sheet has more than doubled in size since late September. I’d be happy to be corrected here, but I don‘t recall this arousing critical comment and analysis from Guido and DK.

Can't speak for Guido or DK, But C@W have warned that the Bank has lost control some time ago, of interest rates and monetary policy in general. Hence my fears about their ability to deliver QE.

There can be an economic case for QE, as I wrote here some months ago. However, with Politicians in charge it is never going to work in reality. They won't know when to end it and will want to manipulate it for electoral purposes. It has given Japan 170% GDP debt ratio and still sclerotic growth. All the more reason to have some oversight of the BOE and some published statistics for clever economists such as Chris Dillow to review its progress.