Sunday, 4 December 2011

QE: Mervyn King versus Andrea Leadsom.

Battle of wits between, on one side, Mervyn King governor of the Bank of England plus another BoE official, and on the other side, UK politician Andrea Leadsom. I’ve tried to summarise the exchange of views below. Or for the video, see here (starting at around 43 minutes. (Put your cursor on the bar just below the “movie” to bring up the slide bar which enables you to start half way thru the “movie”.)


Ms Leadsom tries to establish that when a central bank buys government bonds in the market (as under QE) and then sells them back at a lower price, the central bank makes a loss. Mervyn King and friend give evasive and suspiciously complicated answers.

Using conventional accounting, obviously the central bank makes a loss. But there is really no such thing as a central bank making a profit or loss: the job of a central bank is simply to feed money into the economy in a recession, and withdraw money when inflation looms.

When a central bank is trying to impart stimulus (as under QE), it is arguably a positive benefit if it “makes a loss”: in doing so, it feeds more money into the economy than if it made a so called profit.

The far more serious question is this. Should central banks be feeding money into the pockets of the wealthy: those who hold government bonds? That is, shouldn’t the government and central bank (considered as a single unit) feed money into Main Street during a recession, rather than into Wall Street?

So Mervyn King’s response to Ms Leadsom should have been “What if the BoE does make a loss: so much he better”. And Ms Leadsom’s accusation should really have been “What in God’s name do you think you are doing enriching the already stinking rich people who work in the City of London, rather than boosting every British high street?”.

Least that’s the way I see it.


Afterthought (same day). Warren Mosler made the point that a central bank should be likened to the umpire in a game of tennis: that is, someone who dishes out points (money) as appropriate. As Warren explained, those “points” do not come from anywhere. And the umpire in a game of tennis does not “lose” anything by awarding points. Put another way, the umpire does not “make a loss” as a result of awarding points.


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