The Bank's scepticism

British capitalism is dysfunctional, and policy-makers have done little since the crisis began to repair it. This isn't (just) my opinion, but that of some monetary policy committee members. Today's minutes show that some thought that:

the benefits of further asset purchases were likely to be small relative to their potential costs. In particular, further purchases could lead to an unwarranted narrowing in risk premia.

For me, this is one reason to favour looser fiscal rather than monetary policy. Fiscal policy can be targeted towards real investment and jobs, whereas monetary policy, especially near the zero bound, has more uncertain scattergun effects.

But leave this aside. Let's ask: given the fiscal stance, is this a good argument against loosening monetary policy*?

Two things suggest not.

First, "narrowing risk premia" is not a bug of QE but a feature. One way in which QE is meant to work - and probably did at first (pdf) - is by encouraging a portfolio rebalancing towards corporate bonds and equities, which reduces firms' cost of capital and thus stimulates capital spending.

Secondly, even if looser monetary policy does lead to asset bubbles, this needn't be catastrophic. For example, the tech bubble burst in the early 00s without serious adverse effects upon output - not least because it wasn't accompanied by large deleveraging or counterparty risk - and it left us with a useful legacy of a broadband infrastructure and some valuable companies.

Why, then, are these considerations weak? The answer could be that MPC members believe two things (or at least attach some weight to them):

- that there's such a dearth of good real investment opportunities that looser monetary policy will instead lead more to malinvestments than to more productive activity.

- that the capacity of the financial system to bear risk is still so impaired that asset bubbles can't deflate without adverse effects.

Insofar as these are the case, then capitalism - in both its real and financial forms - is still dysfunctional. In this sense, MPC members are as sceptical about the functioning of the economy as some of us Marxists.

* I suspect a similar objection could be made to issuing forward guidance, as well as to QE; what's at issue here is monetary policy generally, not the precise form of it.

Comments

[Luke]

Not sure this changes what you say, but does QE aim to (or actually) diminish the risk premium between stuff like govt bonds and equities/corporate bonds? Or does it aim to (or actually) make the return on safe assets so pathetically low that people invest in racy stuff? So corporate bonds might still be 2% higher than govt bonds, but you have a chance of a real return.

[Metatone]

Can we just note that random motion of money into equities does next to nothing for company financing in the short run? It's only companies selling new shares that raise money this way - and most of those aren't part of the rising indexes.

[aragon]

We are counting the days to the next financial crisis. And the Tech Bubble was not the railways, very little physical infrastructure resulted, and it was followed by another asset bubble.

We don't have fibre to the home, and returns from copyright and network effects are just monopoly rents.

Lack of investment opportunities, or just excessive returns on financial and some non-financial assets (housing) and some IT.

We have seen a huge transfer of wealth to the rich, including through privatisation.
(30% returns for the water industry) and inflating the stock market through QE not to mention the inflation of then housing market (off balance sheet).

[paulc]

"rebalancing towards corporate bonds and equities, which reduces firms' cost of capital and thus stimulates capital spending"

I see Metatone got there before me but yes it is a weak argument today. I was listening only a couple of weeks back to John Kay on a LSE talk say the very same thing about equity markets; that companies don't raise capital there any more. So it must be that they simply want to push up existing stock prices to reap the wealth effect.

[Ralph Musgrave]

Not only is QE a load of nonsense, monetary policy as a whole (QE plus interest rate adjustments) is fundamentally defective for the following reason.

Monetary policy channels stimulus into the economy exclusively via borrowing and investment, and there is no reason to suppose the optimum mix of investment and consumption spending changes as between when an economy is in recession and when it ins’t. You might as well channel stimulus into the economy exclusively via car production, restaurants and massage parlours.

Put another way, if in a recession, the only stimulus is fiscal, then employers who experience increased demand for their products can would decide for themselves when and how much additional investment to make without any assistance from the economic illiterates in Westminister or the Bank of England.

[SteveH]

The trillions currently being hoarded by the 'employers' should be noted here also.

We should also be very aware of how high levels of government/state assistance is critical to high class Broadband infrastructure.