Monday, 24 August 2015

Prominent Economists Who Advocate a Different Type of Quantitative Easing

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Both John Maynard Keynes and Milton Friedman proposed a style of Quantitative Easing (QE) that was aimed at the real economy. In effect they advocated a different form of QE than that which we are experiencing today: one that would be relayed away from the banking sector and speculators and towards consumers, non-financial businesses and low income earners – and one that could directly back investment projects, rather than create risky asset price bubbles. But who are Keynes’s and Friedman’s contemporaries?

Ben Bernanke, former Chairman of US Federal Reserve Bank
“In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices…A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money. Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets.”

Lord Adair Turner- Member of UK Financial Policy Committee, former Chairman of Financial Services Authority
“’Helicopter money’ – by which we mean overt money finance of increased fiscal deficits – may in some circumstances be the only certain way to stimulate nominal demand, and may carry with it less risk to future financial stability than the unconventional monetary policies currently being deployed.”

Professor John Muellbauer, Oxford University
“Clearly, the ECB must develop a strategy that works in the Eurozone’s unique system, instead of attempting to follow the Fed’s lead. Such a strategy should be based on Friedman’s assertion that ‘helicopter drops’ – printing large sums of money and distributing it to the public – can always stimulate the economy and combat deflation.”

Professor Richard Werner, University of Southampton (The Economist who coined the term QE)
“This staggering £275 billion largely ended up with the banks in the futile hope that it would result in a substantial increase in UK lending to business. Instead it was used to rebuild their balance sheets and invest in commodity speculation. To ensure that this does not happen again, we need a different kind of QE, to help the wider economy directly and to implement some badly needed green projects that would enhance the sustainability of the economy and improve the environment-as well as creating thousands of new jobs.”

Yanis Varoufakis, Current Finance Minister of Greece
“The EIB/EIF has been issuing bonds for decades to fund investments, covering 50% of the projects’ funding costs. They should now issue bonds to cover the funding of the pan-euro-zone investment-led recovery programme in its totality; that is, by waving the convention that 50% of the funds come from national sources. To ensure that the EIB/EIF bonds do not suffer rising yields, as a result of these large issues, the ECB can to step in the secondary market and purchase as many of these EIB/EIF bonds as are necessary to keep the EIB/EIF bond yields at their present, low levels. To stay consistent with its current assessment, the level of this type of QE could be set to €1 trillion over the next few years…Moreover, this form of QE backs productive investments directly, as opposed to inflating risky financial instruments, and has no implications in terms of European fiscal rules (as EIB funding need not count against member states’ deficits or debt).”

Biagio Bossone, Chairman of the Lecce Group, former Executive Director of World Bank Group
“Now more than ever, what the Eurozone needs is that injections of new money be directed to households, not to commercial banks and high wealth individuals, and that households be reassured that no new tax obligations will be imposed on them to foot future tax bills associated with higher debt. What needs to be done is to use monetary and fiscal policies in a coordinated manner with a view to ensuring that money is created and distributed to agents with a high propensity to spend it.”

Professor Steve Keen, Kingston University, UK
I would have used the capacity of central banks to create money by making a direct injection into individuals bank accounts on a pro rata basis, complicated to work out how, but basically injecting money into peoples bank accounts, on the condition that those people who are in debt pay there debts down so that way you have private debt cancellation coming out of it, not therefore not only benefiting debtors but also benefitting savers who would also get it, and rather than paying down their debts down they would get an increase in cash levels…Its a very indirect and expensive way of getting very little bang for your buck…”

Paul McCulley and Zoltan Pozsar, Chair, GIC Global Society of Fellows and Director at Credit Suisse in the Global Strategy and Research department
“In the cooperation framework the central bank overtly subjects itself to become a partner of the fiscal authority in stimulating economic growth directly as a borrower and spender of last resort for as long as necessary in order to reduce economic slack and thereby root out deflationary dynamics – a target reaffirmed by strategy. In the inflation targeting framework the central bank first generates expectations of negative real interest rates (via commitments to low rates for long, purchases of long-term bonds, or prioritizing employment over inflation) in hopes of the private sector then becoming a willing partner to borrow and dis-save in response to this stimulus – a target that’s in and of itself the strategy… In this paper we argue that simple inflation targets without being reinforced via fiscal-monetary cooperation will fail.”

MP Caroline Lucas, Green Party of England and Wales Politician
“It is understandably difficult for people to get their head around the idea that the Bank of England could magic up £50 billion of Green Quantitative Easing. Yet it has already e-printed £275 billion (around £4,000 for every man woman and child in the UK) in an effort to get increased borrowing to British business via giving the money to the banks. But this money has completely failed to reach small businesses in the real economy which urgently need support. The bankers have had their £275 billion chance. Now it’s time for the Bank of England to help create jobs, stabilize the economy, and support the environment through a package of Green Quantitative Easing.”

Sushil Wadhwani, Former Member of Bank England Monetary Policy Committee
“We need to ensure the extra money leads to higher demand. One good place to start is with the textbook example of printing money to finance consumption – sending every adult in the country a voucher that can be spent in the next three months. Allocating £300 to each of Britain’s 50m adults to spend on goods and services would cost £15bn, or 20 per cent of the £75bn created by the new round of QE. (In 1999, the Japanese government distributed $175 vouchers to the public – 99.6 per cent of them were spent within the six-month limit.) Perhaps you can persuade the MPC that this is preferable to buying gilts?”,

Professor Randal Wray, University of Missouri-Kansas City 
“…if you don’t ramp up the fiscal stimulus, and keep it ramped up until a full blown recovery has occurred, you will remain trapped in recession.”

George Magnus, Senior Economic Adviser to UBS Investment Bank
“Ultimately, the Bank could get involved in direct lending to SMEs and to the government, so that the latter could fund infrastructure and other programmes to boost employment. Extra ordinary times call for comparable economic thinking. We are a long way from having to worry about inflation and, as things stand, the status quo on policy is leading us into a depression that will sink your medium-term fiscal and economic strategy, to say nothing of the disastrous social consequences.”

Professor Mark Blyth, Brown University
“Unless one subscribes to the view that recessions are either therapeutic or deserved, there is no reason governments should not try to end them if they can, and cash transfers are a uniquely effective way of doing so. For one thing, they would quickly increase spending, and central banks could implement them instantaneously, unlike infrastructure spending or changes to the tax code, which typically require legislation. And in contrast to interest-rate cuts, cash transfers would affect demand directly, without the side effects of distorting financial markets and asset prices. They would also would help address inequality — without skinning the rich.”

Professor Lucrezia Reichlin, London Business School
“In a situation of persistently weak economic conditions it makes sense to consider all options including tools that have stayed long in the closet.”

Simon Jenkins, Journalist at The Guardian
“Abandon helicopters. Use bombers. Bomb Germany, France, Italy, Greece, the entire Eurozone. Bomb them with banknotes, cash, anything to boost demand. The money must go straight to households, not to banks. Banks have had their day and miserably failed to spend. From now on they get nothing.”

Larry Elliot, Journalist at The Guardian
“QE could have been better designed. There could have been a better dove-tailing of monetary (interest rates and QE) and fiscal (tax and spending) policies. There was a strong case for the targeting of QE at specific sectors of the economy, such as green infrastructure. In retrospect, far too much faith was put in the banks to channel QE to where it was needed. Handing a cheque directly to members of the public would have got money into the economy much more effectively.”

Ann Pettifor, Director of Policy Research in Macroeconomics, Honorary Research Fellow at the Political Economy Research Centre at City University and a fellow of the New Economics Foundation, London
“Instead, with the help of the monetary authorities, government could increase spending on sound infrastructure projects. Low-cost financing by the Bank of England would enable George Osborne to implement Vince Cable’s public infrastructure investment plans.” or a Green QE “The idea of ‘Green QE’ is that the Bank of England would – with the agreement of the government – buy bonds from e.g. the Green Investment Bank, which could then use the financing to subsidise low carbon projects.”

Lord Skidelsky, Professor of Political Economy at the University of Warwick
“If we want to print money, I would direct it not to the banks but into the pockets of the British people. This is akin to Friedman’s helicopter money. Here are two ideas: first, we could have a temporary wage subsidy paid to employers to encourage them to take on more workers; secondly, the Government might give every household a Christmas present in the form of a voucher to be spent on British goods within three months. There are many other methods, but the object would be to get the biggest bang of spending per buck of money.”

Collin Hines, Convenor of the Green New Deal Group
“It is time for a debate about what kind of QE can actually turn round the continent’s flagging economy. The Green New Deal group’s paper “Europe’s Choice — How Green QE and Fairer Taxes Can Replace Austerity” suggests the introduction of “green infrastructure QE”.

Robert Peston, Financial Commentator at the BBC
“Because what has been really striking about QE is that it was popularly dubbed as money creation, but it hasn’t really been that. If it had been proper money creation, with cash going into the pockets of people or the coffers of businesses, it might have sparked serious and substantial increases in economic activity, which would have led to much bigger investment in real productive capital. And in those circumstances, the underlying growth rate of the UK and US economies might have increased meaningfully. But in today’s economy, especially in the UK and Europe, money creation is much more about how much commercial banks lend than how many bonds are bought from investors by central banks.”

Richard Wood, Former Policy Advisor to Australian Treasury and Author of How to Solve the European Crisis: Challenging orthodoxy and creating new policy paradigms
“In respect of monetary policy, overt money financing (creating new money and channelling it through net government spending to low income people, infrastructure and the unemployed) could replace the ineffective and wasteful quantitative easing policy as a means to stimulate economic activity. Quantitative easing finances banks and speculators; creates asset price bubbles; distorts risk pricing and resource allocation; causes competitive devaluations and currency wars; and results in reversals and financial distress on exiting the policy. Quantitative easing has no direct positive impact on consumer prices as predicated by the central banks of Japan and the United States.”

Eric Lonergan, Fund Manager and Author of Money: The Art of Living
“Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.”,

Edward Harrison, Financial Commentator BBC, CNBC, and Fox News
“What we want to see for economic growth to occur is that financial institutions are making loans to productive parts of the economy that have the greatest impact on sustainable long-term economic growth. Further, we want to see this economic growth underpinned by household and business income that supports further growth down the line. The key here is that the growth comes not from the financial sector or financial assets but from productive assets that throw off income which can be used by businesses and households to repay the debt and take on even more as productive ventures become available.”,

Richard Murphy, Tax Research LLP
“This, of course, is Green Quantitative Easing  where money is created, in exactly the same way that it was to bail out the banks to the tune of £375 billion, but  this money is instead used to finance investment in the UK economy.  This might be investment in infrastructure such as transport, hospitals, schools and new energy systems, or investment through a Green Investment Bank in partnering British business in creating new opportunities in this country for the benefit of our economy. This is not money that will, in that case,  leave the UK economy: the whole purpose of this activity is to invest as much as possible of the money in this country, and for the long-term to make a return for us all.”

Matt King, Credit Strategist at Citi Group
“Germans make the point that QE just puts off necessary reforms. I’m very sympathetic to that view,” says Mr King at Citigroup. “We’re in a period when investment should be high. People should be saying: ‘I can do something useful with all the cheap money and put it into the real economy.’ But the investment we’re seeing is very disappointing. In the energy sector it is actually being cut.”

Felix Nugee and Johnathan Hazel, Wilberforce Society at University of Cambridge
“An ideal solution, then, would marry the efficacy of fiscal policy at the ZLB with the efficient design of monetary policy. Our argument – and the next part of this paper – is that the proposal of helicopter money can unite these two objectives.”

Paul Serfaty, Director of Asian Capital Partners, Hong Kong
“There is nothing ‘Keynesian’ about using central bank money to buy financial assets as a putative substitute for shortfalls in aggregate demand. Indeed, the failure of this policy to bring about significant multiplier effects, and the pooling of cash in banking and corporate coffers, shows how poor a substitute it is for what Keynes himself recommended: that government should spend directly on capital works, putting cash in the pockets of the employee-consumer, thus driving demand.”

Thomas Fazi, Member of European Progressive Economists Network and author of The Battle for Europe: How an Elite Hijacked a Continent – and How We Can Take It Back
“Overt money financing is the policy with the highest impact in raising demand and output without increasing public debt and interest rates.”

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