Bill Totten's Weblog

Friday, February 20, 2009

Finally, A Correct Move

This article indicates that the Bank of England has finally turned to what should be the first prerogative of any nation: To coin and print the nation's money instead of allowing private banks to print most of it. Please see the comments I have interspersed. Bill Totten

We must print more money, says Bank

Governor appeals for urgent action to salvage Britain's shrinking economy

by Sean Farrell, Financial Editor

The Independent (February 19 2009)

The Bank of England is to start 'printing' new money for the first time in thirty years as it runs out of options to kick-start the economy. The Governor of the Bank of England will write to the Chancellor within days to get permission for the unprecedented action.

The Bank will create the money by buying government and corporate bonds from financial institutions for new supplies of sterling. Termed "quantitative easing", it is the modern equivalent of printing money. It is designed to put more cash into the economy, creating more money for companies to spend and for banks to lend.

The move marks the most dramatic step taken yet by the Bank as it tries to stop the deepening recession turning into a slump. One of the main reasons for the financial crisis has been the unwillingness of banks to lend money after the sub-prime losses in the US.

Critics have branded the action irresponsible and said it could stoke inflation and spark a run on the pound but the severity of the recession has driven the usually conservative central bank to throw caution to the wind.

TOTTEN: What per se is irresponsible for government coining and printing its own money? The US Constitution reserves that function for the government. Is it more responsible to let private banks, that are addicted to making as much profit as possible as fast as possible to enrich their shareholders and executives, to print most of the nation's money in order to maximize the interest income they reap by loaning it into circulation? The "critics" who claim it is irresponsible for democratically elected governments - instead of profit-maximizing private banks - to coin and print the their nations' money are arguing against democracy itself: they are arguing, without saying so explicitly, that we can trust the greed of private banks more than our own ability to elect responsible government.

The minutes of this month's Monetary Policy Committee meeting, released yesterday, showed a unanimous vote to request the go-ahead from the Chancellor. Alistair Darling is expected to reply immediately to the Governor's letter in an exchange that will cap urgent work at the Bank and the Treasury to allow purchases to start as soon as possible.

Andrew Goodwin, a senior economic adviser to the Ernst & Young ITEM Club, said: "It is crucial that the Bank be allowed to swiftly and boldly implement this policy. The lack of supply of credit is the biggest problem facing the UK economy and increasing the supply of central bank money via purchases of government securities should help to loosen these restrictions", Mr Goodwin said.

Under measures announced last month, the Bank is already authorised to buy up to GBP 50 billion of assets to help unblock frozen markets but without increasing the supply of money to the economy. The Bank's rapid move to the extreme option of creating new money in exchange for the bonds underlines the increasing sense of crisis.

TOTTEN: What is "extreme" about democratically-elected government coining and printing a nation's money instead of allowing profit-maximizing private banks to print most of it and reap the interest they gain when they put it into circulation via loans?

The Bank's nightmare is a sustained period of deflation - general falling prices - which would prolong and deepen the recession by encouraging consumers and businesses to delay spending. A short period of falling prices is expected later this year, driven by dropping energy costs, but with inflation falling and the economy contracting quicker than forecast, the Bank wants to act to prevent a downward spiral.

The results of a CBI survey released yesterday showed manufacturers' order books shrinking at their fastest rate since 1992 and companies expecting to cut output at a pace not seen for nearly thirty years. The measure of export orders slumped to its lowest since November 2001, quashing hopes that sterling's recent sharp fall would boost overseas sales for British businesses.

The Bank has never taken such a radical step to boost the money supply before but similar measures were used by Japan in the early 1990s and during the 1970s when the supply of sterling was increased. Critics argue that creating new money did not prevent Japan's "lost decade" of stagnation.

The Bank has started a softening-up exercise to rebuff accusations that quantitative easing amounts to recklessly turning on the printing presses in a way that has driven countries such as Zimbabwe into hyperinflation.

Charles Bean, the deputy governor for monetary policy, said on Monday the aim was to boost the supply of money and credit to achieve the Bank's two per cent inflation target and not to finance a government budget deficit as happens in corrupt regimes.

With the economy "undergoing a significant and sustained adjustment" and inflation heading for negative territory, the Monetary Policy Committee decided it would need more than rate cuts to limit the recession and keep inflation close to its two per cent target in the medium term. The minutes showed doubts growing about the impact of further interest-rate cuts as the committee agreed to slash borrowing costs to a record low of one per cent.

It voted 8-1 in favour of the half-point reduction. David Blanchflower called for a one-point fall but the majority rebuffed his call for a bigger cut because it could deter banks from lending.

"There was a great deal of uncertainty about what would happen to banks' and building societies' ability and willingness to lend at low levels of interest rates", the minutes said. "There might even be a point where further cuts in bank rate could have an adverse impact on the economy". Mr Blanchflower said past errors were due to cutting too late and not too soon.


Bill Totten


  • Mr. Totten:
    I think I need some of your software as my computer is compromised big time. Your note about the book vanished.About the "War on" book, don't worry about the cost. I plan to take a copy of it with two other books to Judge Ocempo at the Haque International Court. The others are "Torture Team" by QC Phillippe Sands and "Spies for Hire" by Tim Shorrock who, without a title has his numbers, names speak for him. Am chicken but Geert Wilders refusal to be allowed to promote his 'Fitna' film and book in UK gave one courage. Suzanne de Kuyper Amsterdam

    By Blogger Suzanne, at 10:26 PM, February 21, 2009  

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