Three things were notable from Sir Mervyn King's speech to the South Wales Chamber of Commerce in Cardiff. The first, which is not unusual, was the sombre tone and the admission that there are limits to what monetary policy can do in this situation.
The second was his concern about the banking system. The £80 billion Funding for Lending Scheme should get more credit into the economy, he said, but also: "The window of opportunity which it provides must be used to restore the capital position of the UK banking system." This appears to be giving the banks a green light to use the scheme as much to help themselves as the economy.
He also rejected an array of alternatives that have been suggested, including the writing off of the gilts the Bank has acquired under quantitative easing and a so-called helicopter drop of money onto the economy. He said: "There has been some talk about the possibility that money created by the Bank could be used directly to finance additional government spending, or even that money could be given away. Abstracting from the colourful metaphor of “helicopter money”, such operations would combine monetary and fiscal policies."
And concluded: "Not only is combining monetary and fiscal policies unnecessary, it is also dangerous. Either the government controls the process – which is “bad” money creation – or the Bank controls it and enters the forbidden territory of fiscal policy. It is peculiar, to say the least, that some of the same people who believe that the Governor of the Bank is too powerful also believe that he should stand on the steps of Threadneedle Street distributing £50 notes – a policy which you will appreciate is rather hard to reverse. For the same reason, the Bank could not countenance any suggestion that we cancel our holdings of gilts. The Bank must have the ability to reverse its policy – to sell gilts and withdraw money from the economy – when that becomes necessary. Otherwise, we run the risk of losing control over monetary conditions."
That's the strongest defence of the Bank's QE model I have seen. Given that some of these more unconventional ideas, rightly or wrongly, have been associated with Lord Adair Turner, a candidate to succeed King as Governor, it must also be seen as a slapdown for him. The speech is here.