Opinion: How to make QE into good Liberal Democrat policy

In the last week, there has been a silly fuss about the risk posed by a hung parliament following the next general election. Nick Clegg has scotched the idea that the Liberal Democrats would undermine stability. In fact, his party has taken far more steps than the others to demonstrate credibility to the markets. Cherished policies have been sidelined in the interest of stablity.

The UK’s leading economics writer, Martin Wolf, agrees that there is nothing to fear from minority government, adding: “I cannot be the only person who believes that Vince Cable is far better qualified to address this challenge than any current member of the Conservative front bench”.

However if the fuss has focused minds on who will be in charge of economic policy, the answer is not as obvious as you may think. If you swallowed the scare stories about hung parliaments, you might think it was the leading party in Westminster.

But after a year in which the Bank of England has used Quantitative Easing to buy a quarter of the national debt, this may be changing. The moment the Bank chooses to sell is the moment the next Chancellor may be forced into a premature fiscal squeeze. We used to worry about keeping the Bank independent of the Government – now it’s the other way round.

The Liberal Democrats were right to support full independence for the Bank, because monetary policy is normally politically-neutral. Pursuing low inflation doesn’t usually risk taxpayer funds, have obvious distributional consequences, or address problems that involve market failure. QE is different. There are considerable funds at risk – it could be tens of billions of pounds. How the policy is implemented makes a radical difference depending on whether you are in the financial sector or not, or depending on your wealth. And it looks like it can’t work without being targeted, and taking different kinds of risk; such as by lending more directly to those companies currently starved of bank lending, or by supporting plans like those for a National Infrastructure Bank.

We liberals are meant to be forever sceptical of interference in the free market. But financial markets are still broken, undermining the economic freedom of everyone, big or small – and particularly small. Making QE more effective would be a step towards a more liberal economy and more choice for everyone. And more political involvement will safeguard democracy against a Bank that looks likely to become increasingly powerful, particularly if the Conservatives get in.

* Giles Wilkes is liberal think-tank Centre Forum’s award-winning chief economist. He writes about the ideas in this article, and much more, in Credit where it’s due, CentreForum’s report on Quantitative Easing.

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