Tuesday, 17 January 2017

True quantitative easing.

Richard Werner (economics prof at Southampton in the UK) is widely credited with originating the term “Quantitative Easing”, something which he himself does not deny, far as I know. But in a short paper published in 2012, and entitled “The Euro-Crisis: A To-Do-List for the ECB”, he claims that QE as now widely understood is not in line with what he originally proposed. However, it strikes me this paper has a number of defects, as follows.

First, in an attempt to claim that more bank lending would be beneficial he says “Our  research  has  demonstrated  that  domestic  demand  is  a  function  of credit  creation.” True, (as indeed Steve Keen keeps pointing out). However, it’s not the only source of demand: demand will rise if the state simply creates new base money and spends it into the private sector (and/or cuts taxes and/or raises public spending).

I.e. you can’t argue that because X has effect Y that therefor X is the BEST WAY to bring Y about.  Indeed the defectiveness of the latter “XY” bit of logic is nicely illustrated by the next of Werner’s questionable claims….

He says on p.3 “there is simply no demand for loans.” But p.5 suggests a way out of the problem is for banks to lend more. Well if there is little demand for loans, that rather suggests that while more loans would increase economic activity a bit, it’s not a brilliant way of doing so.

P.5 says “1. The ECB should purchase all non-performing assets from all Eurozone banks at face value, in exchange for banks agreeing to comply with a new ‘credit guidance regime’ run by the ECB.”

Well that’s a HUGE subsidy for the private bank industry. We’ve had enough of state funded subsidies for private banks what with the TBTF subsidy and the fact that governments have allowed private banks to do pretty much what backstreet counterfeiters do, namely print their own money.

GDP increasing transactions.

The rest of Werner’s paper divides loans into “GDP transactions” and “non-GDP transactions”. Presumably that’s the popular idea that a loan for example to have a house BUILT is somehow better than a loan to purchase an EXISTING house because the former results in about two person YEARS of employment (for bricklayers, carpenters, etc), whereas the latter only results in about two person WEEKS of employment (for estate agents etc).  I explained the flaws in the latter “GDP” idea in an article entitled “Do non-productive loans matter? Nope” published about two years ago.

The basic problem with the Eurozone.

Finally, Werner’s proposals do not address the BASIC problem in the Eurozone (EZ): that’s the fact that EZ members cannot devalue their currencies when they become uncompetitive. Instead, uncompetititve countries have to endure years of austerity in an attempt to get their costs down and in line with more competitive countries, like Germany.

Thus even if the increased lending by private banks that Werner advocates WERE TO bring about increased economic activity and demand in problem countries, that would just increase inflation in those countries (and/or slow down the pace at which prices were falling in those countries). That would just mean those countries going further into debt (Greece style) and delaying the point at which they become competitive with core countries like Germany.

Of course it can be argued (and indeed has been argued) that the “Greek treatment” is too harsh, and that a longer but less harsh recuperation period would be better. But that’s really just tinkering: there isn't a HUGE AMOUNT to choose between a short harsh recuperation period and a longer but less harsh recuperation period. The total amount of “harshness” is about the same in each case.

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