Monthly Archives: July 2009

Quantitative easing – expanding base money in circulation (mainly bank reserves with the central bank by purchasing government securities) – isn’t working in the US, the UK or Japan.  Credit easing – outright purchases of private securities by the central bank, which can either be monetised or sterilised – is achieving little in the US or the UK, although it has not been pushed too hard yet.  Enhanced credit support in the Euro Area – providing collateralised loans on demand at maturities up to a year at the official policy rate – is not working either.  These policies are not improving the ability and willingness of banks to lend to the non-financial sectors.  They have had little positive impact on the corporate bond market. It is not surprising why this should be so, once we reflect on the actions and the conditions under which they are taking place.

In a nutshell: quantitative easing (QE), credit easing (CE), and enhanced credit support (ECS) are useful when the problem facing the economy is funding illiquidity or market illiquidity.  It is useless when the binding constraint is the threat of insolvency.  Today, liquidity is ample, even excessive.  Capital is scarce.  Capital is scarce first and foremost in the banking sector.  A panoply of central bank and government financial interventions and support measures have ensured, at least for the time being, the survival of most of the remaining crossborder banks.  It has not done enough to get them lending again on any scale to the household and non-financial enterprise sector.

Like most authors, I tend to cringe when I read something I wrote more than a few years ago.  But while engaging in some authorial auto-archeology recently when preparing the index for a new paper (after all, if I don’t cite myself, who will?), I was pleasantly surprised with a few bits from a paper I wrote in 1999 and published in 2000 in the Bank of England’s Quarterly Bulletin, titled “The new economy and the old monetary economics”.

The paper takes aim at the assertion, rampant in 1999, that the behaviour in recent years of the world economy, led by the United States, could only be understood by abandoning the old conventional wisdom and adopting a ‘New Paradigm’. Prominent among the structural transformations associated with the New Paradigm were the the following: increasing openness; financial innovation; lower global inflation; stronger competitive pressures; buoyant stock markets defying conventional valuation methods; a lower natural rate of unemployment; and a higher trend rate of growth of productivity.

I argue, first, that the New Paradigm has been over-hyped. “…Unfortunately, the ‘New Paradigm’ label has been much abused by professional hype merchants and peddlers of economic snake oil.”

Second, I argue that, to the extent that we can see a New Paradigm in action, its implications for monetary policy have often been misunderstood.

I was particularly pleased that I had written following about financial innovation:

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website

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