The threat of QE2


Austrian economist Professor Anthony J. Evans has written a think piece for us on the dangers of a second round of quantitative easing. He argues that quantitative easing is a counter-productive policy:

Policies like QE increase regime uncertainty and generate systemic instability. They have the potential to make matters worse, and ignore the fact that you cannot buy confidence. The Bank for International Settlements – one of the few organisations that foresaw large elements of the financial crisis – warns about the upside risk of continued low interest rates. Systemic misallocation of capital (including human capital) remains. Excessive risk-taking remains. Over-leveraged balance sheets remain. Volatile capital flows remain. We know that we still don’t know the amount of toxic debt in the economy, so not only are the conditions that led to the crisis still at work, but they are growing as time passes.

Evans goes on to suggest an alternative, laissez-faire approach:

Firstly, economic recovery will only come when we begin to rebuild the capital stock through investment. And rather than recapitalise the banks through taxpayer bailouts, it can be done through an increase in voluntary savings. Secondly, the recession itself is a sign that markets are adjusting, and that entrepreneurs are engaging in the recalculation that is required to understand which plans were unprofitable and where capital should be reallocated. Allowing relative prices to adjust as quickly as possible, reducing labour market rigidities, and improving labour mobility will all help with this.

He concludes by noting that "such policies will not return us to the euphoria of 2008, but they will generate a platform for genuine and sustainable economic growth. There is an alternative to more QE."