Thursday, November 1, 2012

Bank of England's Charlie Bean on limits of quantitative easing

It is not very often that a central banker admits that their policy might not be very effective, but the Bank of England's Charlie Bean does this when describing the current limitations of quantitative easing.

As reported by the Telegraph,
The prospect of more money printing has receded after Charlie Bean, the Bank of England’s deputy governor, revealed he had doubts about how much growth the policy would deliver in what could be a key shift at the central bank.... 
In his speech, Mr Bean said QE could still be used to lower gilt yields and other borrowing rates, but he questioned how much economic value that would deliver.
At the same time, he warned that very loose monetary policy can “delay the transition to a new growth path”....
“What to my mind is a more open question, though, is the degree of traction these lower yields have on demand at the present juncture,” he said. “That does not mean that quantitative easing is impotent. But I think there are reasons to believe the effect of lower yields may be weaker than usual at the current juncture.” 
He explained that QE is useful if it “can encourage households and businesses to bring forward expenditure”. But he warned that “such intertemporal substitution will be weaker when uncertainty is elevated and when banks and some households are concentrating on repairing their balance sheets” as he said is currently happening.
This is a big "if".  In fact, this "if" might not have occurred starting with the first round of QE.
The risk of loose monetary policy, he argued, was that it “can delay the transition to a new growth path if it slows the process of balance sheet repair and inhibits the process of creative destruction as unprofitable firms are closed and the liberated resources shifted to the expanding sectors”....
Please re-read the highlighted text as Mr. Bean has confirmed what your humble blogger has been saying about QE containing its own headwinds and not delivering when the economy is facing a bank solvency led financial crisis.
His comments are likely to be welcomed by pensioner groups that oppose QE.
A group that represents a sizable headwind to the success of QE as they might elect to shift current consumption into the future to protect their savings.

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