Mark Reckless is PPC for Rochester and Strood and was previously a top three rated city economist.
Does ‘radical monetary action’ mean more than guaranteeing certain bank loans if the European Commission allows and suggesting the Bank of England cuts interest rates? What will we do to make monetary policy work and the economy recover?
We should start by recognising how the government and its Debt Management Office (DMO) have disabled monetary policy. They are flooding the market with short-dated government debt, doubling the outstanding stock of treasury bills from £16 billion to £32 billion and increasing short-dated gilt issuance from the £25 billion planned to £63 billion. The DMO is even ‘overfunding’, i.e. selling more gilts than needed even to fund Labour’s current borrowing, a policy last used by us to slow the money supply between 1980 and 1985 and one which is utterly perverse in current economic conditions.
Given this flood of gilt-edged debt, risk-averse investors, particularly banks, lend to the government rather than to the private sector. They buy up the surging supply of short-dated government debt, instead of holding short-term private debt such as commercial paper or bank certificates of deposit. Surely it would be better to tackle this problem by cutting supply of the former rather than setting up an EU-backed bureaucracy to guarantee favoured categories of the latter?
Investors, including banks, are clearly scared to lend, so whether or not they do so will depend crucially on the riskiness of the alternatives. Historically in the UK there has been very limited supply of the lowest risk assets, i.e. debt that is government guaranteed, liquid and short-term. Banking problems in the past have not been exacerbated by the supply of huge amounts of low risk government paper to serve as an alternative to private lending.
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