Tuesday, September 28, 2010
Posen pushes the boat out
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

The KC Stadium in Hull has seen its ups and downs as far as football is concerned. Now it has been provided with a bit of monetary policy drama, courtesy of Adam Posen, the American member of the monetary policy committee (MPC). After Charlie Bean urging people to spend not save, the MPC is in danger of sounding worried.

Posen said he was anxious to stimulate debate. "The case I wish to make is that monetary policy should continue to be aggressive about promoting recovery, and, subject to further debate, I think further easing should be undertaken," he said.

"The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy’s productive capacity, and by investors to avoid risk and prefer cash. Those tendencies are already present, and insufficient monetary response is likely to worsen them. The combination of those risks with the potential attainable gains motivates my call for additional monetary policy stimulus."

He thinks any new easing should differ from the existing £200 billion of QE: There is "a legitimate issue whether the only assets to be purchased by central banks should be (medium- to long-maturity) government bonds, or whether other private assets (such as corporate bonds, commercial paper, or high quality mortgages) might be purchased in quantity by central banks as well. My feeling has always been that while purchasing private assets has some risks, notably in terms of public holdings overhanging market prices, and of difficulty in exiting the position in a given asset market when monetary contraction becomes desirable, these risks are manageable or at least much smaller than the macroeconomic risks of inaction. In fact, my instinct, and I believe that I am not alone in this view, is that purchasing private assets should have a larger macroeconomic impact than purchasing government bonds."

Bold stuff, and one that indeed opens up the debate. He says he is not committing himself to voting for more QE. It can only be a matter of time. The speech is here.