Leading article: QE is welcome, but not enough

 

Thursday 05 July 2012 18:00 EDT
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"Pushing on a string" was John Maynard Keynes's dismissal of aggressive monetary policy in a recession. Ultra-cheap money is of little force when a business person cannot see a way to make money from an investment no matter how cheap the loan. If you fear you will lose your job then you will not borrow money to buy a new car, no matter how tempting the finance deal.

What is missing is confidence. Without that interest rates can go to zero and QE can expand exponentially with no discernible impact. As good economists, the Governor of the Bank of England, Sir Mervyn King, and his colleagues must be familiar with the operation of the law of diminishing returns. That is not an argument for pushing rates higher or reversing quantitative easing or even leaving it be. The Bank of England's decision yesterday was right. Monetary policy may not be dramatically effective, but things are much better with rates where they are now, and with the quantities of cash being injected into the economy, than they would otherwise be. The Bank is doing its bit for the recovery.

The issue is rebuilding confidence. That is not easy when the headlines from the banking industry and the eurozone are so baleful. There is little a central bank governor or a chancellor can do to counter this. Like our rainy summer, the downpours of bad economic news never seem to end.

The danger is that Britain may already have missed the chance to rescue the situation, just as Japan did in the early 1990s. By the time the Japanese acted, confidence had drained away so badly that no amount of public spending or tax cuts could induce consumers and businesses to spend. In Britain now there is a chance that a major boost to spending on roads, rail and air transport, say, could make a difference, and be consistent with the Government's broad fiscal plan. It would be welcomed by Labour and industry alike. It would cheer us up. It should not be further delayed.

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