Quantitative easing is not the Titanic

A second round of quantitative easing could boost the US economy, help ordinary working Americans, a

While last week's US midterm elections continue to be dissected on both sides of the Atlantic, less attention was paid to the Federal Reserve's decision to embark on a second round of quantitative easing, even though this may have a greater impact on the US economy. Those who have focused on the Fed's decisions have been generally critical, the former Reagan administration official David Stockman calling it "pure monetary heroin" and other pundits predicting that it will spark a global trade war. That noted monetary policy expert, Sarah Palin, has even taken a break from her reality TV show to conjure up fears of hyperinflation, a worthless dollar and a situation where the Federal Reserve becomes "not just the buyer of last resort, but the buyer of only resort".

On one level, people are right to be sceptical. The Bush administration argued in 2008 that only drastic action could prevent depositors from losing their money and firms' temporary lines of credit drying up, claims that the Federal Reserve Bank of Minneapolis debunked in a study days after the bailout was finally agreed. Similarly, the purchase of $1.25trn worth of mortgage securities in early 2009 failed to prevent the rate of growth of broad money (M3) falling into negative territory this summer.

With US unemployment at 9.6 per cent, the only thing that the interventions seem to have achieved is to enable parts of the financial sector to escape the consequences of their own actions. As an "added bonus", the public backlash has helped elect a Congress committed to extending tax cuts for the rich and rolling back Obama's health-care reforms.

However, by purchasing long-term government bonds, which are more likely to be held by households and non-financial corporations than mortgage securities, a greater proportion of the monetary stimulus will find its way directly into the money supply, rather than relying on increased lending. This in turn should boost economic demand and prevent deflation, which is a very real possibility and would delay the process of economic recovery. That the intervention will involve the purchase of a low-risk asset, instead of securities of uncertain value, will reduce the risk of losses to the US Treasury without further rewarding those who lent and invested recklessly.

Even the warnings from the World Bank that the intervention will lead to a weaker dollar are disingenuous. Since the mid-1970s America has run a continuous trade deficit, importing more goods and services than it exports. This deficit, and the consequent borrowing that was used to cover for it, have now been recognised as one of the main causes of the financial crisis, making a solution imperative for America's long-term future.

Because the only other alternatives are deflation, which would further increase unemployment, and protectionism, which could spark a trade war that could tip the world back into recession, letting the dollar slide is the only plausible solution. Worryingly, protectionist sentiment continues to grow, with a poll conducted in September showing that 69 per cent of Americans believe that free-trade agreements destroy more jobs than they create.

Of course, some risks still remain. While an increase in the money supply is needed to speed recovery and prevent deflation, too great an injection will be inflationary. It is also important to make sure that the Federal Reserve sticks to purchasing government bonds from households and consumers, rather than reintervening in the mortgage market or buying securities from banks or financial institutions (which would only increase the monetary base).

The Federal Reserve needs to increase transparency by publishing the basic broad monetary aggregates that other central banks compile, including those that it discontinued in 2006, rather than forcing economists to rely on composites produced privately. There is also the question of why it has taken Bernanke so long to arrive at a solution that would have avoided much of the cost, moral hazard and public anger generated by the bailouts.

Matthew Partridge is a freelance journalist and a PhD student at the London School of Economics.

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"Michael Gove is a nasty bit of work": A Thatcherite's lonely crusade for technical colleges

Kenneth Baker, Margaret Thatcher's education secretary, has been in a war of words with one of his successors. 

When I meet Kenneth Baker, once Margaret Thatcher’s reforming education secretary, conversation quickly turns to an unexpected coincidence. We are old boys of the same school: a sixth-form college in Southport that was, in Baker’s day, the local grammar. Fittingly for a man enraged by the exclusion of technical subjects from the modern curriculum, he can only recall one lesson: carpentry.

Seven decades on, Lord Baker – who counts Sats, the national curriculum, league tables, and student loans among his innovations – is still preoccupied with technical education. His charity, the Baker Dearing Educational Trust, oversees university technical colleges (UTCs), the specialist free schools that work with businesses and higher education institutions to provide a vocational curriculum for students aged 14-19. He is also a working peer, and a doughty evangelist for technical education and apprenticeships in the upper chamber. 

But when we meet at the charity’s glass-panelled Westminster office at 4 Millbank, he is on the defensive – and with good reason. Recent weeks have been particularly unkind to the project that, aged 82, he still works full-time to promote. First, a technical college in Oldham, Greater Manchester, became the seventh to close its doors since 2015. In three years, not one of its pupils passed a single GCSE, and locals complained it had become a “dumping ground” for the most troubled and disruptive children from Oldham’s other schools (Baker agrees, and puts the closure down to “bad governorship and bad headship”). 

Then, with customary chutzpah, came Michael Gove. In the week of the closure, the former education secretary declared in his Times column that the UTCs project had failed. "The commonest error in politics," he wrote, quoting Lord Salisbury, "is sticking to the carcasses of dead policies". Baker is now embroiled in a remarkable – and increasingly bitter – war of words with his successor and one-time colleague.

It wasn't always this way. In 2013, with UTCs still in their infancy, he told the New Statesman the then education secretary was “a friend”, despite their disagreements on the curriculum. The bonhomie has not lasted. In the course of our hour-long conversation, Gove is derided as “a nasty bit of work”, “very vindictive”, “completely out of touch”, and “Brutus Gove and all the rest of it”. (Three days after we speak, Baker renews their animus with a blistering op-ed for The Telegraph, claiming Gove embraced UTCs about as warmly as “an undertaker”.)

In all of this, Gove, who speaks warmly of Baker, has presented himself as having been initially supportive of the project. He was, after all, the education secretary who gave them the green light. Not so, his one-time colleague says. While David Cameron (Baker's former PA) and George Osborne showed pragmatic enthusiasm, Gove “was pretty reluctant from the word go”.

“Gove has his own theory of education,” Baker tells me. He believes Gove is in thrall to the American educationalist E.D. Hirsch, who believes in focusing on offering children a core academic diet of subjects, whatever their background. "He doesn’t think that schools should worry about employability at all," Baker says. "He thinks as long as you get the basic education right, everything will be fine. That isn’t going to happen – it isn’t how life works!" 

Baker is fond of comparing Gove’s heavily academic English baccalaureate to the similarly narrow School Certificate he sat in 1951, as well as the curriculum of 1904 (there is seldom an interview with Baker that doesn’t feature this comparison). He believes his junior's divisive tenure changed the state sector for the worse: “It’s appalling what’s happening in our schools! The squeezing out of not only design and technology, but drama, music, art – they’re all going down at GCSE, year by year. Now children are just studying a basic eight subjects. I think that’s completely wrong.” 

UTCs, with their university sponsors, workplace ethos (teaching hours coincide with the standard 9-5 working day and pupils wear business dress), and specialist curricula, are Baker's solution. The 46 existing institutions teach 11,500 children, and there are several notable success stories. GCHQ has opened a cyber-security suite at the UTC in Scarborough, North Yorkshire, as part of a bid to diversify its workforce. Just 0.5 per cent of UTC graduates are unemployed, compared to 11.5 per cent of all 18-year-olds. 

But they are not without their critics. Teaching unions have complained that their presence fragments education provision and funding, and others point out that hard-up schools in disadvantaged areas have little desire or incentive to give up children – and the funding they bring – at 14. Ofsted rate twice as many UTCs as inadequate as they do outstanding. Gove doubts that the vocational qualifications on offer are as robust as their academic equivalents, or anywhere near as attractive for middle-class parents. He also considers 14 is too young an age for pupils to pursue a specialist course of vocational study.

Baker accepts that many of his colleges are seen as “useless, wastes of money, monuments to Baker’s vanity and all the rest of it”, but maintains the project is only just finding its legs. He is more hopeful about the current education secretary, Justine Greening, who he believes is an admirer. Indeed, UTCs could provide Greening with a trump card in the vexed debate over grammar schools – last year’s green paper suggested pupils would be able to join new selective institutions at 14, and Baker has long believed specialist academic institutions should complement UTCs.

Discussion of Theresa May’s education policy has tended to start and finish at grammar schools. But Baker believes the conversation could soon be dominated by a much more pressing issue: the financial collapse of multi-academy trusts and the prospect of an NHS-style funding crisis blighting the nation’s schools. Although his city technology colleges may have paved the way for the removal of more and more schools from the control of local authorities, he, perhaps surprisingly, defends a connection to the state.

“What is missing now in the whole education system is that broker in the middle, to balance the demands of education with the funds available," he says. "I think by 2020 all these multi-academy trusts will be like the hospitals... If MATs get into trouble, their immediate cry will be: ‘We need more money!’ We need more teachers, we need more resources, and all the rest of it!’."

It is clear that he is more alert to coming challenges, such as automation, than many politicians half his age. Halfway through our conversation, he leaves the room and returns enthusiastically toting a picture of an driverless lorry. It transpires that this Thatcherite is even increasingly receptive to the idea of the ultimate state handout: a universal basic income. “There’s one part of me that says: ‘How awful to give someone a sum for doing nothing! What are they going to do, for heaven’s sake, for Christ’s sake!’" he says. "But on the other hand, I think the drawback to the four-day working week or four-hour working day... I think it’s going to happen in your lifetime. If people are only working for a very short space of time, they will have to have some sort of basic income.” 

Predictably, the upshot of this vignette is that his beloved UTCs and their multi-skilled graduates are part of the solution. Friend and foe alike praise Baker’s indefatigable dedication to the cause. But, with the ranks of doubters growing and the axe likely to fall on at least one of its institutions again, it remains to be seen in what form the programme will survive.

Despite the ignominy of the last few weeks, however, Baker is typically forthright: “I sense a turning of the tide in our way now. But I still fight. I fight for every bloody one.”