Monday, November 01, 2010

Werner - what Quantitative Easing should mean

What Richard Werner revealed last week  showed why the world economy stumbles so often and explained why the movement of wealth is from poor to rich. The School of Management held its regular seminar at Southampton University (chaired by Deputy Director Dr John Marti) and was a capacity event.  Werner showed we should not expect solutions until certain  banking practices are revealed and transformed to work for the public good rather than for banks. The key aspect of banking that is critical for the productive and non-inflationary growth of the economy is credit creation. 

Werner told us: 'Don't bash the bankers' - they are doing just what we told them to do: maximise profits. It is implicit with the grant of any public privilege, that it should not be used against the public. But we have not told the banks how to use their power of monopoly. We don't tell them that they should allocate credit to productive purposes but not to speculative ones. Over the  last 30 years we have paid homage to non-intervention in the markets, so bankers poured a spate of credit into crazy, risky schemes. Now we are reaping the full fury of unbridled profit-seeking gone wrong, and, as taxpayers, paying to rebuild the system and the banks.

Prof Werner's theme for the evening was to discern the meaning of the term 'Quantitative Easing' (QE) as used by central bankers (by the Bank of England in particular - let's call it BoE-QE) and what he meant by QE when he coined it the mid-1990s in Japan (RAW-QE). Quoting from the BoE's own leaflet 'Quantitative Easing explained' he showed that BoE-QE, means nothing more than what central banks have always done. Along with the adjustment of interest rates, they inject money into the economy by buying government bonds/other assets, or sometimes withdraw it by selling them. This is quantitative action and normal behaviour by a central bank. It has been known in the past as expansion of: reserves, high powered money, base money, monetary base, M0, money supply. So it seems that BoE-QE is merely the re-branding of an old product. 

So what of RAW-QE? Werner's findings as to what was needed in Japan was reported in the newspaper Nikkei (2 Sept 1995). He had predicted that none of the above 'expansions'  would bring sustainable growth to the long-ailing Japanese economy. What was needed was specific 'expansion of bank credit to the real economy' - that is, to all sectors except real estate and financial institutions.  He called this: 'quantitative easing'. The Bank of Japan had opposed RAW-QE for some years but said in 2001 it had adopted QE - but what sort of QE was it? Werner showed us that the Japanese monetary experiment 2001-2006  was nothing other than an old style conventional scheme. In fact BoJ-QE, was a precursor of BoE-QE. The only difference to old style schemes is that we are now told a little more of what is going on (mere public relations?). BoJ-QE then and BoE-QE now are not new departures in central banking and BoJ-QE did not root out recession then. 

Sustainable growth will follow when credit, firstly is allocated so that it reaches the whole productive economy including small and medium sized firms and secondly it is prevented from feeding non-productive, speculative schemes. His suggestion was to use the banking model of Germany where 70% of the bank sector is locally owned and controlled.  This aligns with comments of Amar Bhide and Hayek quoted in this blog for October 25 2010.

A feature of Werner's investigations and revelations is that he shows up the lack of intellectual rigour of conventional economics. If something goes awry from theory it is labeled 'anomaly'. Trouble is, with so many anomalies, as Werner suggests, perhaps the type of economics is the anomaly. Meanwhile crises recur and wealth imbalances grow.

You can access the entire presentation through the Southampton University SoM website  or directly e-mail to: .  Ask for 28 Sept seminar paper: 'Quantitative Easing' - What you always wanted to know about it, and what you are not supposed to find out.
posted by Charles Bazlinton

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