I wrote a piece on Keynes and monetary policy for the Standard, which appeared on Thursday, 23rd October, 2008. You can read it below. Today a group of monetarist economists , supported by a range of bankers, have written to the Telegraph objecting to a public works programme to help economic recovery. They are right that excessive liabilities on the government’s balance sheet could cause interest rates to rise, but government spending has a multiplier effect, and very quickly pays for itself. They seem unaware of this economic fact. There is some overlap between our views on monetary policy as an effective tool, but I disagree with their view that UK government spending has been excessive.
Nor do I share their complacent view that: “Occasional slowdowns are natural and necessary features of a market economy”. First, this is not a slowdown. This is a hugely destructive and likely to be prolonged global economic failure, unprecedented in history. Second, there is nothing at all “natural” or God-given about this failure. It is man-made and these letter-writers are largely to blame for the economic policies of financial de-regulation that have led to the biggest financial meltdown “since the First World War” to quote Mervyn King of the Bank of England.
From the Evening Standard, by Ann Pettifor
“JohnMaynard Keynes suddenly finds himself in favour with all those enamoured of fiscal policy. These range from governments and central banks trapped in economic orthodoxy to free marketeers in the private banking sector benefiting from taxpayers’ largesse. However, bail-outs will not prevent individuals, households, small and big businesses going bust because of onerous borrowing costs.Keynes’ advice would first and foremost be to cut interest rates to the bone; that is all rates, short and long, real, safe and risky.
Keynes laid far greater store by monetary policy than fiscal policy.He believed it is both sustainable and cost-effective to manage financial crises by sharply lowering borrowing costs.This remedy involves neither tax payers’ funds nor burdening the balance sheets of central banks or governments.Today the governors of the Bank of England and the European Central Bank stand firmly in defiance of this key pillar of Keynesianism. Contrary to his advice they prefer to keep interest rates high and periodically lose control over the Libor rate set by the private banking sector.
Keynes did not believe that the burden of economic renewal should be carried overwhelmingly by the public sector.Indeed he was against excessive public spending primarily because it caused long-term interest rates to rise.Instead he wanted to diversify the process of economic renewal by ensuring the private sector played a full part.For the private sector to be able to do that, requires extremely low rates of interest.Only by easing monetary policies will Alistair Darling and Mervyn King be said to be reflecting Keynes’ true priorities.”