The quantitative easing conundrum

May 13, 2009

adriankidd2- Adrian Kidd is financial planner at Unleash Advice. He was voted 50th Most Influential IFA in the UK by Professional Adviser magazine 2008. The opinions expressed are his own.-

The Bank of England tells us that their 75 billion pound quantitative easing programme will start the banks lending again (despite the banks saying that they are already lending, this is not strictly true). The programme works by the Bank buying securities from the banks and then this money can be loaned to consumers. The question is, does and will this work? Is 75 billion pounds enough?

The answer thus far is that we do not know yet, just as we do not know if the series of aggressive rate cuts have started to take effect. It usually takes around 12-18 months for an interest-rate hike or cut to be noticed in the monetary systems, but as the cuts were regular and steep they may filter through quicker than normal.

Quantitative easing usually happens when base rates are at or close to zero since interest rate cuts can effectively go no lower. The last time we saw quantitative easing was in Japan in the 1990s. Analysts said it stopped their economy from worsening, although it can be argued that Japan has taken 15 years or so to recover from this and that perhaps we are the next Japan (very low rates for a long period of time with little place to manoeuvre on fiscal and monetary policy).

What can happen if this does not work? We could see two scenarios. The first is what is known as the “helicopter drop” where the Bank drops money into the economy without the buying of any assets.

This could be done by giving all of us “one-off” payments to encourage us to start spending (they did this in Taiwan previously) or the government could change the rules on the banks in which it has large stakes and force them to lend more money, although the chances of this seem slim.

They could also buy more assets and increase the quantitative easing programme, but the government also has its own problems in balancing the books as it puts us further and further into the red – more than any other government in history.

Could the Conservatives do any better? I would like to think they could, but I am doubtful. It would be like saying they can resolve our current state pension or NHS issues. They are so far gone that all they can do would be to better manage them, but these problems will take a lifetime to resolve – if in fact they will ever be resolved.

So, although we may see a change in government, it would remain to be seen if things get any better under a new regime and I am sure the Obama administration is seeing the same over the pond. His tenure, I am sure will be spent resolving the immediate debacles he has been left by the previous administration before he can truly make his desired changes.

The one thing that is different in our current situation from the Great Depression of the 1930s, is the global decisions to act and act as one. This could be and should be a saving grace that will help us see the road to recovery in the second half of 2010 (and not at the end of this year as our Chancellor suggests). Also, the fact that regulation will have to made to work as it has clearly failed us again.

If we are clever, we will all learn and come out of this better and we should as human beings learn from our excessiveness, both at consumer and corporate levels. As the famous saying goes “Fool me once shame on you, fool me twice shame on me”.

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