Here's a link to the debate: http://www.bbc.co.uk/programmes/p004ccwm (@ 14mins 40secs). As ever any resemblance of legibility stems from good editing rather than the raw materials, but as promised I'll share some notes.
I was very impressed with Stephanie Flanders. She's one of the few mainstream economics journalists that I enjoy to watch and often learn something from. Her performance reflected the fact that she is knowledgeable and experienced. However she was representing the Bank of England against critics of QE, rather than my arguments per se. This is an inevitable facet of media debate, but a frustrating one to participate in. It is simply impossible to have a conversation in the time given, as opposed to trade soundbites. I don't mean the latter in a disparaging way - it's a key form of economic communication, but it's a skill I need to develop.
In terms of substance, I think she
misunderstood my first point. I argued that the concern with QE is that
whilst it is building up latent inflation that could manifest itself in
the economy, there is also a danger that QE doesn't work and we end up
in a double dip recession. My point is that it's a relatively narrow
corridor between these two outcomes, and no one has the experience to
guide us through it with any confidence. Stephanie's response was that
economists like myself can't have it both ways, and simultaneously
argue that QE is both too impotent and too dangerous.This misses my argument on two counts. Firstly,
I was answering the question put to me by the chair, about the concerns
of QE. I was not passing judgment on the success or otherwise of the QE
that the Bank has been engaged in. Regardless of whether we think it's
working or not, my point was that I'm skeptical of QE because in order
to *be* successful policymakers must steer through a narrow corridor. Secondly, therefore, I wasn't saying that QE leads to both, but that would lead to one or the other
and I (nor anyone) really knows which. So I don't agree that I should
"choose between these two bad outcomes" - it is possible that QE makes both more likely.
Indeed Stephanie and I agreed that this is completely unchartered territory (i.e. "The Bank of England doesn't understand the mechanisms"). The difference is that she seems to think that "doing nothing" is not an option, whilst I (and this part didn't air) feel that it should. Not necessarily an option that we take, but something to consider deeply. In short, if we have no idea whether the harm of an action outweighs the benefit, it might be wise to do nothing. If we're stood on the edge of a cliff, we shouldn't march forward with more conviction and a "vision" about things all working out in the end.
The important thing about QE, according to Stephanie, is that is "sends a signal at quite an important time", but this is precisely why it has the capacity to increase the chances of both of the above scenarios - we don't know how to manage confidence. As Greg Mankiw has said,
Until we figure it out, it is best to be suspicious of any policy whose benefits are supposed to work through the amorphous channel of "confidence."
The only "signals" that entrepreneurs need are reliable price signals that are underpinned by consumer values and opportunity costs of production. The only "signals" they need in the loanable funds market are the interest rates that coordinate voluntarysavings and proposed investment plans. When the Bank of England (or indeed the Treasury with it's fiscal policy) attempt to provide "signals" this has the potential to do more harm than good. I don't want investors in the city listening to the Bank, I'd rather they were getting on with running their businesses. The recovery will come when less attention is given to the news, and to policymakers, and bureaucrats, and people get on with creating wealth. My main concern at the moment is regime uncertainty, and I wished journalists would appreciate this downside to policy choices.
Finally, the chair asked me if there was anything that would
convince me that QE is a good thing. I didn't really answer the
question because I tried to ram home the point that excess credit
creation caused the crises, and it therefore won't be the cure. For me
this is the classic Austrian argument (i.e. the hair of the dog), and I'm delighted it aired on such a well-listened to programme. But if I were to really answer that question, I'd say
that in some situations, given the present financial institutions, a
monetary deflation (which we experienced in 2008 despite what the
official data tells us) should be offset by monetary expansion. I feel
that the Bank of England has (i) done too much; and (ii) of the wrong
sort; and thus the readjustment process required to renew the economy is not happening. But the point I really wanted to make is that the
harm of inflation is not just higher prices. It's changes in relative
prices that lead to asset price bubbles that constitute the business
cycle. Mainstream economist believe that the "exit strategy" is simply
soaking up excess liquidity. It's not. It's about sorting out the
misallocations of capital that accompany inflation. No one seems
concerned by this.
QE undermines the productive capabilities of the economy in order to prop up the balance sheets of the city. The public should be deeply hostile.
P.S. I have an MP3 file of the debate, so if you can't hear it on the link above drop me an email