Plan B: Print money for the public

Dear Chancellor,

The economy is in a sorry state, with GDP flat-lining over the past year and the level of output still well below its previous peak. Levels of business and consumer confidence are low, and there is a significant risk that this could become self-perpetuating. Like Japan during the 1990s, the UK could easily end up experiencing a "lost decade". It is thus critically important that you respond forcefully.

I fear that the Bank of England is too optimistic about the efficacy of its quantitative easing (QE) policy, whereby it buys gilts. Recall that this type of QE was tried in Japan as the economy there fell into a "liquidity trap" (when low and even zero interest rates do not stimulate consumer spending, rendering conventional monetary policy ineffective). It failed. Hence, it is hardly surprising that the current policy mix here, of fiscal tightening combined with QE, has failed to work. Now is therefore the time to try the other, more unconventional policy weapons you have at your disposal. Because we cannot be certain that any one of them would either work or be enough, it is best to deploy several together. In particular, we need to stimulate demand, improve credit supply and help deal with the euro crisis.

As the lower long-term interest rates produced by QE do not appear to be having much of a stimulative effect, we need to ensure that the extra money leads to higher demand. A good place to start is with the textbook example of printing money to finance consumption - sending every adult in the country a voucher that can be spent in the next three months. Allocating £300 to each of Britain's 50 million adults to spend on goods and services would cost £15bn, or 20 per cent of the £75bn created in the new round of QE. (In 1999, the Japanese government distributed $175 vouchers to the public - 99.6 per cent of them were spent within the six-month limit.) Perhaps you can persuade the MPC that this is preferable to buying gilts?

Next, you should help resolve the euro crisis - which is the largest single risk factor confronting us. No longer can we play the innocent bystander, pleading with the Europeans to sort out their mess. Given the political constraints, the eurozone's problems are now too big for its members to resolve without outside help.

The economist Raghuram Rajan suggests that the International Monetary Fund should set up a special purpose vehicle (SPV) to offer large lines of credit to countries such as Italy, which are plausibly solvent but are experiencing a speculative attack, and to permit banks to be recapitalised. This SPV would issue bonds.

You should persuade the IMF, along with the European Financial Stability Facility (EFSF), to back this. The Bank of England and other central banks with QE programmes should buy the paper issued by the IMF's SPV (with the Treasury protecting the Bank's balance sheet from any losses). The individual country adjustment programmes, where needed, should be IMF-run, so boosting their credibility. Such an approach would help resolve a crisis that is leading businesses across the world to postpone hiring decisions. It would be much more stimulative than buying gilts.
To summarise, we need to experiment with imaginative alternatives to current policies that are not working. Moreover, we must not wring our hands and blame the eurozone for our woes; it is time to regain control of our destiny.

Sushil Wadhwani is founder and chief executive of Wadhwani Asset Management. He served on the MPC from 1999 to 2002

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