When it comes to monetary policy, Britain has become the Evil Knievel of the developed world. This week the Bank of England began printing money to ‘save’ the British economy. I can’t understand why anyone would believe ‘quantitative easing’ (QE) is a good thing. And when I was chatting to some of the City experts who regularly attend our Roundtable meetings the other day, none of them liked the idea either.
One made a particularly good, and deeply disturbing, point. Buying government debt with new money is seen as one of the most extreme forms of QE – it’s a bit like the government just writing itself a cheque. The US, whose central bank head Ben Bernanke has been one of the most vocal advocates of money printing, has quietly backed away from this form of QE. The Bank of England, on the other hand, has dived right in, sending gilt yields plunging.
Why the radical, devil-may-care approach? The trouble is that Gordon Brown is working under a skewed incentive scheme. The ‘heads I win, tails you lose’ structure of the financial industry has rightly been fingered as one of the driving forces behind the financial crisis. The bonus structure in banks and hedge funds encouraged traders to take big, reckless bets – if they won, they got to keep the profits; if they lost, it was someone else’s money. So they chased huge returns, with little respect for the risks they were taking. The bad news is that this same lop-sided risk-reward strategy applies to our prime minister’s actions too.
Pundits are knocking Barack Obama for moving too slowly on the financial crisis. But he’s got good reason to dither. What he does now, he’ll have to live with for the next four years. He doesn’t want to risk everything on creating a semi-recovery now that fizzles out by the time he’s up for re-election. So he can afford to take it slowly.
Gordon Brown, however, has barely a year to go before he has to call a general election. And for Mr Brown to have even a slim chance of being returned to power, two things have to happen. The economy has to recover, obviously. But more importantly, voters have to believe that any recovery is down to actions taken by him.
So he has to be seen to act. If pumping the economy full of counterfeit cash can create the illusion of health before the election (and make no mistake, an illusion is all it will be), he can worry about clearing up the mess afterwards – if he wins. And if it doesn’t work at all, or leads to rampant inflation, well, that’s just more scorched earth for the opposition to contend with when they get into power. Mr Brown has nothing to lose. Shame the rest of us can’t say the same.