2 steps out of the global recession: Step 1

It has long become clear that the financial crisis has been on a scale deeper and larger than many people have suspected. It has also been exacerbated by muddled policy responses from all Governments and policy makers. Whilst the need to control debt is not in doubt, capital expenditure projects should be pursued and tighter bank regulations need introducing (with much clearer splits between retail and investment banks); all economies are still struggling.

Quantitative Easing (QE) – effectively the printing of money to buy up Government debt, and shore up the banking sector, helping banks’ balance sheets. It has not really got money flowing through the economy. A bolder step, which Australia tried in 2009 (and avoided recession), is to direct QE, not at the banks, but directly at the taxpayer. This can be in the form of temporary tax cuts or even just a cheque from the Government. This BBC article explains the concept in more detail.

Why do I think it could work? Well at the end of the day I see nothing to suggest that additional money from the Bank of England is moving its way into the real economy. Giving the money direct to the people, may or may not work, but it’s no worse than the current method. Some people will use it to pay off debt – in which case the banks still get the money. Some people will spend it, which should help drive demand in the economy and create a multiplier effect. The proposed solution would be monetary policy financing fiscal policy.

There are inflationary risks, and we can’t print our way out of trouble (although by definition you’d be against QE in general then), but in an economic downturn, the inflationary risks are low. There is also the problem that this doesn’t solve the global problem. This is where Step 2 comes into play – to be discussed tomorrow…

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One thought on “2 steps out of the global recession: Step 1

  1. This solution makes sense to me, Phil. If the banks will not lend to the companies and people, who need the cash, then your answer is good. I wonder why this solution has not occurred to the Treasury? Has Danny Alexander been asked? If he does not get this one right, can we expect any better of him and his team over his new respobsibility, the Trident alternative review?

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