It's the way you you tell them!!!!

Last night I attended a lecture given by Lord Adair Turner, Chairman of the FSA, at the CASS Business School in London. His topic was "Debt, Money and Mephistopheles - How do we get out of this mess?" and in essence he was advocating that regulators include "Overt Monetary Finance" or OMF in their tool kit of economic stimuli - something that has been considered taboo by many.

Now Lord Turner summarised a 2 1/2 hour paper into an hour's talk and I am endeavouring to capture some of the essence and insights in this (short) blog post so please forgive me if anything gets lost in translation. Added to this I am not an economist at heart, but a physicist so I may have heard things differently.

In essence OMF seems to be the creation of permanent new money, something that is associated by many with inflation and other undesirable consequences. The acceptable version is Quantative Easing or QE where money is again injected into the system, but temporarily and this the the thing about the way you tell it.

When questioned at the end Lord Turner admitted that there was little difference between OMF and QE other than with OMF created the expectation that the change was permanent and would not need paying back in the future while QE is billed as temporary and is expected to be paid back in future. Neither set of expectations actually guarantees future policy and the QE could effectively become permanent the same way OMF could be reversed. Instead it is all about the message you send to the markets.

There is however another difference and that is where the money is injected into the system. In QE the injection is into bank liquidity with the expectation that this will have possitive impacts on teh economy from increased lending etc. This of course relies on the Banks actually passing this on and on people wanting to borrow - two behaviours that are not guaranteed in a perido of deleveraging such as we are in.

In contrast OMF goes into the income stream through things such as tax cuts, public works creating employment and putting wages into pockets, etc. In short this goes directly to the consumers.

A key argument from Lord Adair was that OMF need not be taboo if one accepts that the economic lever you use is decoupled from the specific outcomes/targets of price levels and supply. In this case any tool could be used.

That said he warned that OMF could be politically dangerous if politicians became addicted and, having realised it was possible and acceptable, used it too often to buy votes before elections etc.

All in all, Lord Adair is an impressive speaker and the contention was interesting ahead of statements from the new Governor of the Bank of England, but I was left with the (layman's) thought that it was more about how you present the injection of money to interested parties ie how you tell it!