Adam Posen’s warning that QE has not gone far enough comes as RICS survey shows house purchases at lowest level in five years
The Bank of England needs to turbo-charge its policy of printing money to save the economy from a long depression, according to one of the central bank’s key policy makers.
Adam Posen, who sits on the Bank’s monetary policy committee, said it needed to extend its programme of quantitative easing and to take greater risks.
Posen’s stark warning is a reaction to the continuing recession and to the failure of Britain’s banks to increase their corporate lending to small- and medium-sized companies.
He said the Bank needed to take greater risks on its balance sheet to persuade investors it is safe to back British companies and get the economy moving ahead.
His comments came as a report showed home purchases at their lowest level for five years and recruiters warned recent growth in permanent jobs had tailed off.
RICS, which represents surveyors, said the dearth of transactions meant its members were completing 15.6 sales a year compared with 25.4 a year at the peak of the housing boom in May 2007. The 40% drop in the last five years “goes some way to illustrating the extent to which market activity has fallen”, said RICS following its May housing market survey.
Prices also continued to fall last month as 16% more respondents reported falls rather than a rise. This reading has been in negative territory since June 2010.
Manpower, the national recruitment firm, said private sector firms continued to hire permanent staff in May but at a slower rate than the previous month. The positive balance of +1 was held up by the more confident outlook of big companies in London, while firms in Wales registered a negative balance of -5.
A survey of employers by KPMG for the Recruitment and Employment Confederation also found a modest rise in permanent jobs in May after a slowdown from April. It registered the strongest growth in the Midlands and among IT and engineering staff. Labour market surveys have previously proved to be a lagging indicator of the economy’s health, with firms continuing to show positive hiring intentions up to six months after a downturn in growth.
Bernard Brown, a partner at KPMG, said: “With the number of people securing permanent jobs increasing for the fifth consecutive month and official figures showing a drop in unemployment, it would be easy to assume that we are turning a corner. The reality, sadly, remains very different as the latest figures highlight the lowest monthly rise since last December, indicating a return to uncertainty and cautiousness when it comes to recruitment on the part of many employers.”
Posen said part of the answer to sluggish growth should be a new institution, along the lines of US domestic mortgage provider Fannie Mae, to lend funds to small- and medium-sized firms. He said this bold move would supplement the £325bn lent under the current QE arrangement, which the Bank of England has restricted to the purchase of government bonds.
Critics of QE have argued the scheme has failed to boost bank lending or confidence in the prospects for the economy. Posen, who said he regretted voting against more QE in April and May, maintains that QE has complemented the government’s fiscal austerity and prevented a deeper slump.
He said: “If monetary policy makers can credibly convince investors that good borrowers will not be caught short of liquidity and credit, they will hoard less cash and invest in more risky assets.
“We have gone a good way towards achieving this by making cash and gilts (or Treasuries) relatively unattractive for solid investors like pension funds and insurance companies while providing funding to the financial system.
“But the cash sitting on balance sheets of even companies with access to capital markets and the extent of de-leveraging in our banking systems indicates that we have not gone far enough.”
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