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QE – a massive wealth transfer to bailed-out banks – failed to bring about significant multiplier effects

January 10, 2015

Keynes recommended that government should spend directly on capital works, putting cash in the pockets of the employee-consumer, thus driving demand.

Ken Palmerton adds, “In calling for additional spending when purchasing power was clearly deficient, Keynes said that it should be issued at ZERO or near ZERO interest”.

Would Keynes have welcomed the German government’s referral of the legality of central bank bond purchases to the European Court of Justice, whose preliminary opinion is due on January 14, to be followed by the European Central Bank’s decision on the size and type of “sovereign” quantitative easing, due on January 22?

Paul Serfaty, Director of Asian Capital Partners in Hong Kong, replied to a letter in the Financial Times, written by McKinsey partner and corporate luminary, Jon Moynihan:

“Jon Moynihan writes with passion and commitment (Letters, October 30), but with less scrupulousness for historical fact. There is nothing “Keynesian” about using central bank money to buy financial assets as a putative substitute for shortfalls in aggregate demand.

“Indeed, the failure of this policy to bring about significant multiplier effects, and the pooling of cash in banking and corporate coffers, shows how poor a substitute it is for what Keynes himself recommended: that government should spend directly on capital works, putting cash in the pockets of the employee-consumer, thus driving demand. “I know it would cause Mr Moynihan conniptions (Ed: a fit of rage or hysterics) but it would at least be genuinely ‘Keynesian’ “.

Verdict of economist Liam Halligan in the Telegraph: “QE has boosted equity prices, hammering ordinary savers and pensioners while handing a massive wealth transfer to bailed-out banks”.

A positive proposal was sent to the FT by the convenor of the Green New Deal Group:

“A new round of QE in the UK could contribute to funding a carefully-costed, nationwide programme of energy efficiency in the nation’s 28 million homes and 2 million commercial and public buildings. Also crucial, such a QE programme would help to overcome the present annual shortfall of 240,000 new, affordable, sustainably sited, energy-efficient homes”.

The previous QE purchased government bonds, and ‘green infrastructural QE’ could buy bonds from a suitable enhanced Green Investment Bank to invest in such a programme.

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