Did you know that there are a number of prominent economists working in the financial sector that are in favour of a different type of QE? Is it surprising that they are in favour of central banks creating new money for the real economy rather than the financial markets?
In a recent post Positive Money showed that there is a strong intellectual body of history behind the various alternative proposals for QE. Both John Maynard Keynes and Milton Friedman proposed a style of Quantitative Easing (QE) that was aimed at the real economy. Today, these types of proposals are commonly referred to as “People’s QE”, “Sovereign Money Creation”, and “Helicopter Money” amongst others.
In effect, both Friedman and Keynes advocated a different form of QE than that which we are experiencing today: one that would be relayed away from the banking sector and speculators and towards consumers, non-financial businesses and low income earners – and one that could directly back investment projects, rather than create risky asset price bubbles.
At Positive Money we have been trying to keep track of Keynes’s and Friedman’s contemporaries and share them with the public. Accordingly, we will be releasing a series of posts that illustrate the various influential people who advocate a different type of QE. Each post will address a separate category of influencers. In our previous post, we highlighted some of the quotes made by prominent Policy Makers and Public Advisors in favour of a different type of QE. Today’s post will reference quotes made by a number of people working in the financial sector. Subsequent posts will highlight quotes made by: Academics, Politicians, Journalists and Media Commentators, Activists and Special Advisors.
Prominent Economists Working in the Financial Sector
Paul McCulley and Zoltan Pozsar, Chair, GIC Global Society of Fellows and Director at Credit Suisse in the Global Strategy and Research department
“In the cooperation framework the central bank overtly subjects itself to become a partner of the fiscal authority in stimulating economic growth directly as a borrower and spender of last resort for as long as necessary in order to reduce economic slack and thereby root out deflationary dynamics – a target reaffirmed by strategy. In the inflation targeting framework the central bank first generates expectations of negative real interest rates (via commitments to low rates for long, purchases of long-term bonds, or prioritizing employment over inflation) in hopes of the private sector then becoming a willing partner to borrow and dis-save in response to this stimulus – a target that’s in and of itself the strategy… In this paper we argue that simple inflation targets without being reinforced via fiscal-monetary cooperation will fail.”
Eric Lonergan, Fund Manager and Author of ‘Money: The Art of Living’
“Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.”
Tuenis Brosens, Senior Economist ING
“Perhaps it’s time the ECB considers a radical new stimulus: helicopter money. As the name suggests, helicopter money is when money drops seemingly from the sky directly into people’s bank accounts. It immediately boosts purchasing power. It is probably a far more effective way to boost spending than measures already undertaken, such as purchasing assets.”
Steve Englander, Global Head of G10 currency strategy Citi Group
“Our ‘innovation’ here is to suggest that central banks will invite fiscal spending by announcing that their balance sheets will stay expanded permanently, or almost equivalently, be reduced only under extreme circumstances, and that they anticipate additional permanent expansion if targets are missed…The argument for fiscal policy via central bank monetization is that it directly injects purchasing power into the economy and will increase activity or inflation or both. QE increases the balance sheet but there is no guarantee that the increased lending and spending will result”
George Magnus, Senior Economic Adviser to UBS Investment Bank
“Ultimately, the Bank could get involved in direct lending to SMEs and to the government, so that the latter could fund infrastructure and other programmes to boost employment. Extraordinary times call for comparable economic thinking. We are a long way from having to worry about inflation and, as things stand, the status quo on policy is leading us into a depression that will sink your medium-term fiscal and economic strategy, to say nothing of the disastrous social consequences.”
George Cooper, Co-Founder and Director of Equitile Ltd, Author of ‘Money, Blood, and Revolution’
“Corbyn’s PQE could be the correct policy for the risks facing our economy in future years. But we should view all monetary policy like medicine. Used to excess PQE will turn toxic and could do more damage than the original disease. Finding the correct dose of PQE will require considerable skill. Avoiding becoming addicted to PQE will require even more self-discipline.”
Paul Marshall, Chairman Marshall Wallace
“Some object that creating money to spend on infrastructure would undermine the central bank’s independence by forcing it to buy direct from the Treasury. Yet monetary policy has already extended well beyond its technocratic bounds into the realms of wealth distribution. QE had clear wealth effects, which could have been offset by fiscal measures. All political parties should acknowledge this. So should those of us who want free markets to retain their legitimacy.”
Jeremy Lawson, Chief Economist Standard Life Economics
“Under certain circumstances, some central banks could formally agree to purchase government debt issued to finance looser fiscal policy without ever selling that debt back into the market; or deliver money financed helicopter drops directly into household bank accounts. If so much policy space exists, why then is there considerable scepticism about what policymakers can do? Much of it boils down to politics. There is a big difference between what can be done and what will be done, especially when there is likely to be even more opposition to these policies than those pursued since the financial crisis.”
Matt King, Credit Strategist at Citi Group
“Germans make the point that QE just puts off necessary reforms. I’m very sympathetic to that view,” says Mr King at Citigroup. “We’re in a period when investment should be high. People should be saying: ‘I can do something useful with all the cheap money and put it into the real economy.’ But the investment we’re seeing is very disappointing. In the energy sector it is actually being cut.”
Paul Serfaty, Director of Asian Capital Partners, Hong Kong
“There is nothing ‘Keynesian’ about using central bank money to buy financial assets as a putative substitute for shortfalls in aggregate demand. Indeed, the failure of this policy to bring about significant multiplier effects, and the pooling of cash in banking and corporate coffers, shows how poor a substitute it is for what Keynes himself recommended: that government should spend directly on capital works, putting cash in the pockets of the employee-consumer, thus driving demand.”
Sam Alderson, CEBR Consultants
“There are issues one would have to iron out if one were to try to execute such a plan, for example the independence of monetary policy is in question if you are to execute People’s QE… But in terms of the economics, it should boost aggregate demand, and in that sense it should help to engender some sort of recovery.”