Will Parliament get to debate 'quantitative easing'?

Today's Independent is just one of the newspapers to report that the Old Lady of Threadneedle Street wants to print more money as part of a programme of what is technically called 'quantative easing'.  From Wikipedia's definition - "Quantitative easing is a term for when a central bank creates money out of thin air to inject into the banking system" - you can tell its normally undesirable.

On 2nd February George Osborne told The Telegraph that he wouldn't rule QE out but that it would be "an admission that everything else hasn't worked."  He continued: "That's why I describe it as the last resort of desperate governments."

John Redwood has, of course, blogged that it has been underway for some time:

"I would urge all those about to broadcast or write on this subject to take the precaution of first reading the latest Bank of England Weekly statements. These show that quantitative easing is well underway. The Bank’s balance sheet has ballooned from well under £100 billion last September, to nearly £240 billion by the year end. Just picking up tittle tattle from “sources” can be very misleading."

You would hope that Parliament would get a full chance to debate the implications of QE but I suspect it won't.

Tim Montgomerie

Comments

[Sally Roberts]

Tim, sadly I suspect you are right!

[Andrew Lilico]

Parliament should have the opportunity to debate all monetary policy, but the dogma of Bank of England independence prevents this.

[Steve Tierney]

In order for parliament to debate it you'd need a government which believes in democracy. I don't believe we presently have one.

[Tony Makara]

What will the effect be on Sterling and the reduced purchasing power of the consumer? This policy will keep bad alive and is a quick-fix with no thought for the morrow. Labour needs to understand it can't buck this recession, it has to let the debt die.

[David_at_Home]

Once upon a time, when I was very young and naive (about 2 years ago), I still believed, as I had learnt for my British Constitution O Level, that government expenditure has to be approved by Parliament, usually as part of a finance bill, following the Budget. In fact, I was under the impression that the English Civil War had been triggered when Charles 1 attempted to circumnavigate Parliament.

What has happened to change all this?

[Malcolm Dunn]

Surely the opposition can call for a debate?

[Dan]

How would you rate the chances of voting down the Labour budget? Surely this would be way of raising the subject?

[christina Speight]

Why on earth has Cameron agreed to let parliament have yet another break when he should be calling the government to account for bringing about our country's ruin ?

[Martin Cole]

The minutes of the last MPC stated:

'The committee unanimously agreed the Governor should write on its behalf to the Chancellor to seek authority to conduct purchases of government and other securities, financed by the creation of central bank money.'

Surely this answers the point raised by Andrew Lilico @ 13:44 regarding the Bank's independence.

If Darling has to give authority on behalf of the Government, should not the Government first seek Parliamentary approval, particularly as ruination of the nation's currency, pensions and savings will be the certain end result?

Does Cabinet Authority cover national suicide these days or is it devolved Royal Perogative in use?

[RichardJ]

Ridiculous idea, printing more money won't produce anything, it will simply kick off another inflationary credit expansion followed by yet another bust.

[m wood]

Why don't you call it what it is - Printing Money? - Or, even more accurately, Buying Votes?

[Paul J]

Almost every child studying economics comes up with the same question-

If we want to increase national wealth, why don't we just print more money?

Anyone with experience of Britain in the seventies will know precisely why we don't do that.

What has it come to when the economic policy of the United Kingdom is simply childish?

[Jamal Akhbar]

Will the Labour government disappear like Sir Alan Stanford, before they can be arrested for large-scale fraud?

Could an individual make a citizen's arrest of the Labour Regime?

[Jacob]

Yesterday's definition on wikipedia began
"Quantitative easing is a tool of monetary policy. It effectively means that the central bank injects new money into the financial system, in order to increase the supply of money."

And then today it was changed to say
"Quantitative easing is a term for when a central bank creates money out of thin air to inject into the banking system. "

The flippant use of the term 'thin air' is clearly supposed to discredit quantitative easing as a policy tool. Just seems like a bit of a coincidence.

[Ross Warren]

We can talk of Money being created out of thin air, and in some respects that is exactly what is going on. However, since we abandoned the Gold standard our money hasn't really been tied to anything solid. Is it that out of order to create more promissory notes? Would somebody like to explain what our money is really based on, as in this instance I'd love more information. Am I right in thinking that quantitative easing is money printed without any addition underwriting being sought. In short its not a loan, because nobody actually provides it.
Rather than simply being undiserable isn't tremendously damaging. The way I read it Q.E. is the difference between what the government wants to spend and what we either have, or can borrow. In which case its inflation waiting to come back , and the danger is hyper-inflation if we are not very careful.

[Jacob]

Having looked at the guy who made the edits to the wikipedia entry it looks like it was just a coincidence. No matter.

Ross,
The danger is not inflation but deflation (I feel dreadful repeating what the PM says). There was a rather interesting article in the FT earlier this week where the argument was made that the Treasury should simply raise the inflation target that the MPC works with to between 4-5% and that would deal with most of the problems we're having but completely screw over pensioners who rely on savings for an income.

[David]

It is the last resort-we've got deflationary pressures and no more room for interest cuts. We therefore need another type of inflationary pressure-printing money is it.

[Jake]

1. Of course parliaments hould have debate on QE. It is basic in any democracy that matters of such moment should be discussed by our elected representatives.

Which immediately begs the question how representaive our parliament and its members are.
Answer: Not very or very little.

2. Would QE work?
Answer: depends on whether you think the recession/impending depression is due to a reduction of the money supply or soemthing else. Ceratainly, there has been huge destruction of capital and this must have had some effect but there has been huge replacement of capital also, by government action. All to little effect.

In the 1930's the American economist AW Kemmerer put greater emphasis on the propensity to spend and its effect on the velocity of circulation. This receives very little attention but is just as important in reducing ecomonic activity. If the V of C reduces by 50% then the money supply also effectivley redices by 50%.

Propensity to spend is probably dependent on a long term biorhythm. After the blow out people have collectively decided to rein in. There is nothing much governments can do about this other than wait. Japan in the 90's was a classic example of QE which made no difference because collectively the Japanese did not want to splurge their money. It was just saved.

letting the bust banks collapse and enduring the resultant economic collapse would probably have been quicker and less detructive of capital and overall less traumatic.
For a PM to allow this would need nerve and clarity of thought foreign to Brown. I am not sure if I were the opposition I would publicly advocate it either. Tactically, the answer must be to address each situation on its merits. eg Northern Rock, RBS and HBOS should have gone into receivership by now. Administration would keep the businesses alive and the economy would not be too damaged.

[RichardJ]

"The danger is not inflation but deflation (I feel dreadful repeating what the PM says)."

Deflation is the necessary cleansing required to rid the economy of all the dud investments made during the boom. It will also be nice for those of us who bothered to save in the good times and are now watching our savings get reduced due to the wreckless behaviour of the borrow and spend brigade.

[T. England]

Guido had a story similar to this on his blog last month.
Growing unease about old lady’s secrecy

[Alex Swanson]

It's all very well criticising Brown for not consulting with Parliament over this, and such criticisms are perfectly valid . . .

. . . but . . .

. . . does anybody really believe that Cameron and Osborne, in the same situation, would behave any better?

And, if anything worse, does anybody really believe that if the matter WERE referred to Parliament, either this one or a future one with a Conservative majority, then the matter would be debated in anything like a reasoned or informed manner, or that the vast majority of MPs wouldn't anyway just vote the way the whips told them to?

[Tony Makara]

"letting the bust banks collapse and enduring the resultant economic collapse would probably have been quicker and less detructive of capital and overall less traumatic."

Jake, this is why a number of us rounded on David Cameron and George Osborne for backing the bail-out. In so doing the Conservative leadership boxed themselves into a corner and gave Brown/Darling/MPC the initiative. This has allowed the government a free hand in responding to the credit crunch, in effect no opposition to the damaging policies that will indebt our people for years to come.

The economy has to take a hit and the bad debtors have to be allowed to go under. Otherwise this thing will never end.

[chris southern]

Quantive easing is a very immoral practice.
the goverment basicly "prints" money and uses it to force the banks into a situation where they start lending to business and the general public again.
if not done carefully it can be very catostrophic in relation to the inflation it will cause.
for those of you who don't realy understand inflation, it's not the prices going up, but the value of the currency going down due to the currency being debaced (due to the amount of it in existance)

and for those that think gold is a better currency, that can (and did) get devased as well (as well as being costly to mint new coins)
it's fractional reserve banking that is to blame, it's a system based around debt that only makes a country poorer in general, not richer as the currency becomes further debased due to the extra "currency" in circulation.

with gordon brown destroying the regulatory system for the banks the mathematical limits of the system have started to aproach us faster than was expected, all they are doing is using more debt (your future labour through taxation) to keep the bust flush alive.

it's literaly a case of having to wait until the next election to get the fool out before the sheer scale of the damage (and your future debt) can be assesed.

[WitteringsFromWitney]

"You would hope that Parliament would get a full chance to debate the implications of QE but I suspect it won't."

Why should the government spoil the habit of their lifetime?

[Steve Tierney]

Posted by: Jacob | February 19, 2009 at 18:42
>>The danger is not inflation but deflation (I feel dreadful repeating what the PM says). <<

Nope, he was right in the first place. The danger IS inflation. It's a little way down the line, but when the enormous amounts of money being printed begin to have their effect on markets, expect inflation.

Indeed, if my suspicion about how MUCH they are going to print is even close to correct, we could well be in for Hyper Inflation.

[Tom H]

Slightly off-topic, but American economist Gary North has an interesting article up today on the possible crisis facing European banks, and the Euro, and examines the strange backtracking done by the Daily Telegraph this week:

http://www.lewrockwell.com/north/north689.html

Earlier this week the DT claimed that the toxic assets held by European banks could total £16.3 trillion, a figure that came from a confidential European Commission report, which the DT claimed to have a copy of.

The story on their website has since been re-written and reference to the £16.3 trillion has now been erased, while the DT hasn't bothered to provide an explanation.

[chris southern]

@Tom H yep, i noticed that as well.
it will have been changed to stop panic and a possible run on the banks, which would lead to even more serious economic problems.

i beleive in the next 5-10 years we will see the banking system (fractional reserve) change drasticly, this will be the easiest way to control banking, leaving the finincial casino junkies to play with the stock market and hedge funds, leaving world economies far more stable (as well as seeing a move away from economic growth through plundering finate natural resources.

[jailhouselawyer]

Tim: Whilst I agree it is a good idea that Parliament should debate issues, would you mind awfully not trying to jump the queue?

Long before the capitalist system collapsed, it was shown at the ECtHR, in the Prisoners Votes Case, that Parliament had not debated the issue before convicted prisoners were denied the franchise. It is almost 5 years since that decision, and still there has been no debate in Parliament.

Whilst I can understand the concerns of the monied class, I have little sympathy because you might remember that Gordon Brown blocked prisoners 3% pay increase, and then allowed bankers big fat bonuses after they had caused us financial ruin because of their greed.

[RichardJ]

The economy has to take a hit and the bad debtors have to be allowed to go under. Otherwise this thing will never end."

For once Mr Makara, you and I are in agreement!

"and for those that think gold is a better currency, that can (and did) get devased as well (as well as being costly to mint new coins)"

Sharp increases in the gold supply are few and far between. Furthermore they're not controlled by the government. Gold isn't a perfect system but it's better than fiat money. Agree with you thought that FRB is the main problem. Once again I would make the point that a 100% reserve gold standard is more likely to succeed than a 100% reserve fiat standard (which would be more vulnerable to government meddling).

[Patrick Harris]

Her Majesty's loyal opposition should force a debate and subsequent vote on such an important issue.
BTW I think you may be a bit late, I heard a treasury minister on the 10 o'clock news state that the legislation was already in place.
How did that happen?
over to HMLO.

[Tony Makara]

RichardJ, I'm glad we can agree on this one. It is deplorable that the government is more interested in creating an artificial spurt of unsustainable growth before May 2010 than considering the long term implications for the economy.

The effect on Sterling will be catastrophic, making the value of our money uncertain, no-one will want to hold our currency. As other major currencies revive we will see the full impact of this manifested through imported inflation. This means that we will be forced to adopt the shock therapy of interest rate hikes just as our economy is on the up again. The government is engaging in a most dishonest form of short-termism, with one eye focused on the next election.

[Gloy Plopwell]

Quantitave easing is a fabulous stupendous idea. Nobody can get credit. let's just print the money and pump pump pump.

and also
Vince Cable has the answers!! I'd like him to do Agriculture though. Just a year to wait for the Lib dem government!