Alchemy

The New Statesman interviews Mervyn King, the most recent ex-Governor of the Bank of England. He’s just published a book, “The end of alchemy” and King is now exploring if Central Banks have run out of policy tools. They examine the problem of banks, “too big to fail”, King proposes a transition from the role of the Central Bank as a lender of last resort to that of a pawn broker or insurer, requiring the banks to pay for the underwriting of their customer deposits. Also they look at King’s assertion that people at work don’t have enough time to think and read, he observes that he only got this back when he got the top job at the Bank. It’s true of all of us though and it reminded me of Mike Threlfall who publicly stated that the desirable utilisation for his consultancy team was 50% since otherwise they ceased to be consultants. The article looks at the heavy reliance on Maths that King’s generation of economists depended upon, and the probability that they thus underestimated the reaction of people. Economic rationalism has been challenged by modern behavioural economists, and in the interview King argues that people (& firms) are pursuing “coping” strategies, rather than utility maximisation strategies and that the traditional macro economic tools no longer work. He’s quoted as saying, “People’s beliefs and expectations cannot be captured by an economist’s view of how the world works”. He’s obviously learned from the 2008 crash, but whether his lessons are enough is another matter. Traditional economists are turning away from austerity, and innovations in both macro-economics and monetary policy are being developed. I should read the economic press’ book reviews of his book. …

Beyond People’s QE

Beyond People’s QE

A day or two ago, Alex Little, published a blog post called ‘Lessons for Corbyn in “Lerner’s Law”’. Lerner’s law suggests that using your opponents language limits your ability to make the argument. Little quotes Bill Mitchell, the inventor of Modern Monetary Theory (MMT) as to how Labour’s leadership in articulating the Darling Plan and its successors talk about balancing the budget and fixing the deficit concede the argument to the Tories. Little’s article also points at Lerner’s economic theories, described as “functional finance” and points at the wikipedia article on it. He argues that by describing the proposed pump priming as PQE, and accepting that when growth takes off, the government may transition to bond financing, by even accepting that we need to live within our means, the theory and benefits from the a more overt radical financing will be lost. …

Does QE work?

In an article in the Guardian, Will Hutton examines the use of QE and the failure of the Bank and Treasury to use it to stimulate investment. Increasing investment is both an expansion of demand, it creates income for its suppliers, and capacity for the economy. The Government and the Bank’s ideology will not permit them to use QE to buy corporate debt and so is doomed to fail to meet the needs of business investment and productivity improvement.

QE creates asset inflation, including house prices; it does not increase demand. …