MPC's Barker defends quantitative easing while Peston argues buying shares in British companies would have been better

13 March 2009 / by Rachel Mason
At a speech to members of South London Business yesterday, Monetary Policy Committee member Kate Barker says the process of quantitative easing is 'necessary.'

But leading economists and MPs are arguing that the Bank of England's decision to buy assets with newly created money is not necessarily the best option for the UK economy.

In her speech, Ms Barker admitted that the base rate cuts were not having the desired affect, and that "a change in monetary policy tool was clearly required, which focuses on the quantity rather than the price of money."

"I strongly support the move to quantitative easing, and consider that once this became necessary, it was important to act in a decisive manner," she said.

"While the scale and timing of these various impacts is uncertain, quantitative easing should bring about a pick up from the present weakness in nominal spending, supporting economic activity."

But leading economists are not so sure; BBC business editor Robert Peston argues that instead of 'printing money', the BoE should be looking at supporting home grown companies.

"The Bank's programme of quantitative easing involves it purchasing up to £150bn of UK government bonds and corporate debt, to increase the stock of money in circulation, encourage lending and stimulate economic activity," Peston explained in his blog yesterday.

"But arguably," he said, "it is purchasing a sub-optimal mix of assets, if it wants to maximise the stimulus to the economy. In theory, it would derive much greater bang for its quids if it bought shares in British companies."

Peston argues that if the Bank bought equities from pension funds and other British financial institutions, it would still be increasing the stock of money, "but there could be a series of spin-off benefits."

"One advantage of buying shares is that it would address directly one of the causes of our economic woes, namely the over-indebtedness of companies," he said, arguing that if the Bank of England were to "wade into the stock market and buy existing shares, that would significantly improve the tone and liquidity of the market - and make it easier for businesses to raise new equity capital in rights issues and in share placings."

Peston also suggests that buying shares in UK companies could offer "a further attractive consequence of state-funded purchases of equities."

"There is unlikely to be a significant increase in bank lending until asset prices in general find a floor," he said, arguing that "a credible equity-purchase programme by the Bank of England could - in theory - provide such a floor. And if the value of equities stabilised, there should be helpful knock-ons to other assets. Which in turn could reinforce banks' confidence to do more lending."

Peston admits that the notion of the Bank of England buying shares is "pretty unorthodox" but says that the economic crisis the UK is currently suffering is too.

"One of the strongest arguments for buying equities now is that - on most analyses - they are cheap. Of course, they may yet become cheaper still," he says, but admits the plan is not fool-proof.

"However if the shares were acquired and held with the intention of holding them for a couple of decades - which the public sector can do - well if we didn't make a substantial capital gain on that kind of time horizon, then we'd be in doo-doo of a depth and toxicity that doesn't bear thinking about," he concluded.

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