The Bank of England's extension of QE on Thursday has been greeted with a big "meh". Other policies - a fiscal boost, credit easing, a helicopter drop, whatever* - might be necessary. So, here's a modest proposal. The Bank of England should buy the debt not of the UK government, but of the Spanish, Italian and Portuguese governments.
This is not a cranky idea. In a famous speech 10 years ago, Ben Bernanke said:
The Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations.
Such a move would have several advantages:
- It would help weaken sterling, thus supporting UK exporters and manufacturers.
- In improving European banks' liquidity and solvency it would help avert the tail risk of financial collapse and so improve lending conditions and business confidence not just in the euro area but around the world.
- In helping resolve the euro crisis, it would boost aggregate demand in the region and so further help UK exporters.
Sir Mervyn has repeatedly said that "the biggest risk to the [UK] ecovery stems from the difficulties facing the euro area." So why doesn't he do something about those difficulties?
The economic argument against the above is that, to the extent that UK exporters price to market, they will respond to a fall in sterling by raising export prices and profit margins rather than volumes. This means output and employment might not benefit much. Sterling's big fall in late 2008, for example, did not obviously have a massively supportive effect on the economy.
I suspect, though, that the real barriers are political. It would be awkward for the Bank to explain to the Daily Heil why it is using "our money" to support Europeans: the fact that we suffer no material loss from conjuring money out of thin air wouldn't cut much ice.
Also, such a policy would be seen as treading on Europeans' toes, of failing to recognize national jurisdictions. The English are often accused of being insufficiently communautaire, but it's also possible to be too much so.
And herein lies my point. All of this highlights a longstanding fact. Economies, firms and markets have become globalized - the euro crisis is having global effects - but governmental institutions, and political attitudes, have not kept pace. And this is doing more damage than generally supposed.
* Targeting NGDP, in itself, is not an alternative. It would merely be a means of facilitating genuinely stimulative policies, be it printing money or fiscal expansion.