Is quantitative easing the solution to the crisis?
On April 28, 2009, the governor of the Bank of Canada, Mr Mark Carney, and the senior deputy governor, Mr Paul Jenkins, appeared before the Standing Committee on Finance, on which I sit, to discuss the Bank’s interventions in dealing with the economic crisis. I asked them a question on quantitative easing, which is the method used by the Bank to increase the money supply when interest rates are close to zero. You can also watch this exchange on the following video clip (mostly in French) or read the adapted transcription below. -- 5 May 2009
Maxime Bernier: In the annex to your Monetary Policy Report, which you tabled last week, you explain how the Bank of Canada will proceed with what the experts call quantitative easing or, in other words, how it will increase the amount of credit in the economy. You traditionally do that by buying treasury bills.
In the context of this exceptional measure, you could also do so by buying financial assets from the private sector, that is to say the shares or bonds of individual private businesses. The bank will buy those assets by creating money out of nothing.
I must first tell you to what extent this practice of creating money out of nothing and artificially inflating credit troubles me. The inflationary theories of Keynes have been discredited for a number of decades. However, you’d think everyone has suddenly become a Keynesian. If creating new money and inflating credit could really stimulate growth, there would never be recessions or economic slowdowns.
In fact, a number of economists believe that excessive money creation caused this crisis. Excessively easy credit during most of this decade purportedly caused bubbles, particularly in the finance and real estate sectors. A recession occurs when those bubbles burst and the economy has to readjust. If it was easy credit that caused the bubbles and the crisis, I would like to understand how we can hope to get out of the crisis by further increasing credit. By doing that, don’t we risk further distorting the economy?
Some say that quantitative easing is now the path to take, since it is practised at most other central banks of the major countries. However, if Canada experiences a less severe crisis because its monetary policy is more conservative and more prudent than those of its partners, it seems to me that doing the same thing as the others is not necessarily the best option.
Mr. Carney, in your report, you admit that purchasing private assets will increase their prices and that that will be done in a neutral manner with respect to sectors and assets of a similar nature. How can you remain neutral, when there are thousands of different financial assets in various sectors? Isn’t the bank running the risk of putting itself in a position where it will favour certain sectors or businesses over others?
Mark Carney: Thank you for your question. First, I would like to emphasize a few points. The objective of these transactions would be… I’m using the conditional for a reason. This isn’t the Bank of Canada’s plan, but it is one card up our sleeve, only in the event it becomes necessary to promote greater monetary easing as a result of a negative shock. We would have options, such as easing credit rules. The purpose of these transactions is to improve financial conditions, credit conditions across Canada as a whole.
As regards neutrality with respect to similar sectors, we can use adjudication, for example. That is one way to be neutral with respect to certain sectors. It’s one tool used by the Bank of England to ease credit.
With respect to your reference to Mr. Keynes, I would simply like to emphasize that it is more a question of Mr. Friedman than Mr. Keynes, this idea of the relationship between the money supply and inflation. In that context, even though our situation and our financial conditions in Canada are better than elsewhere-and that’s the truth-they are nevertheless difficult and are remaining difficult. The velocity of money fell, so that relationship, that danger is much less, as a result of the recession and the global financial crisis.
Paul Jenkins: There are other techniques that can be used to achieve a neutral impact. For example, we could think of the indices. There are techniques that a central bank can use to achieve a neutral impact.
Mark Carney: The Bank of Canada has no interest in pursuing an industrial policy.
Maxime Bernier: I’m very pleased to learn that you’re talking about quantitative easing in the conditional only and that you won’t automatically resort to it. If Canada’s economic position requires it, you’ll have another option in your tool box. I believe that’s very healthy.
With regard to the neutrality issue, if I understand correctly, it’s perhaps not so much the direct purchase of securities in the stock or bond markets, but rather the indices in the various sectors that could help achieve a neutral impact.