14 May 2009

The Boys are Back in the Bubble... Worrying signs on QE?

An interesting piece from Edmund Conway of the Telegraph on quantitative easing here. Conway's political stance sucks (the Institute of Economic Affairs has never published "an excellent pamphlet", and given that for the last 60 years they have been advising governments to reduce regulation of all markets as much as possible, their claim that the credit crunch was caused by lack of financial oversight, while true, identifies them as culpable, along with the rest of the Right wing) but his basic argument looks sensible, and is pretty terrifying.

Conway's basic allegation is that investment banks and hedge funds are making money by buying government debt at cheap prices, and then selling it back to the government (via the quantitative easing operations) at higher prices. I don't have the price data to hand to check this one way or the other, but if it's true, basically the government is handing out taxpayers' money to investment banks and hedge funds. Yes, it's boosting nominal economic activity, but at vast taxpayer expense, and for how long?

Buying private sector debt, not government debt, would be a far better policy, and I don't know why the Bank of England isn't doing that. Hell, printing extra banknotes and dropping them in the street would be a better policy.

It looks like all we're doing is inflating a new bubble to take the place of the old one. That would explain the brief stock market rally of the past few weeks. Forget "green shoots": stage 2 of the economic implosion could be even worse than what we've had so far. Stock up on canned food, kids.

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