A leading Bank of England policymaker has issued an unprecedented call for the Bank "aggressively" to print money and buy mortgage books from the banks to save the economy and protect democracy itself from the dire consequences of a long slump.
With none of the usual temporising, Adam Posen, an American academic who serves as an external member of the Monetary Policy Committee (MPC), said: "The case I wish to make is that monetary policy should continue to be aggressive about promoting recovery, and, subject to further debate, I think further easing should be undertaken."
Citing Japan's decades of post-bubble stagnation after 1990 and the pre-war rise of fascism in Europe, Mr Posen cautioned that such low growth might "erode political moderation and the liberal governments we also must pass on to future generations".
Despite a relatively upbeat report on the UK from the IMF this week, Mr Posen warned: "This is not a normal situation with finely balanced risks on both sides or with monetary policy able to finely calibrate to an outcome." And, for the first time, an MPC member has openly advocated switching from purchase of government securities to corporate bonds, commercial paper and "high quality" mortgages to underpin the supply of credit in the economy.
Mr Posen dismissed the fears expressed by MPC colleagues, notably fellow external appointee Andrew Sentance, that price pressures in the economy may build, especially as inflation is expected to remain above target next year. This "misplaced fear" was less potent than "some very serious risks if we make policy errors by tightening prematurely, or even if we loosen insufficiently. Those risks are not primarily the potential for a double-dip recession... The risks we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity".
This explicit call for more "quantitative easing" echoes the debate within the US, where the chairman of the Federal Reserve, Ben Bernanke, has talked about a new stimulus. Mr Posen added: "Economic recovery following a financial crisis is a long process dominated by the interaction of unemployed resources, dysfunctional banking systems, and the degree of policy stimulus. We are a long way from home, and a long, long way from overheating."
Debate about where the Bank should next take policy has become increasingly polarised in recent months, according to the MPC minutes, speeches and interviews by officials. The balance of opinion within the Committee has also swayed as economic events have swung, in particular after the May sovereign debt crises and the emergency Budget in June. The MPC meets next week, with the probability of a three-way split; there has been no change in policy since November.
Mr Posen's call for a further boost came as the Office for National Statistics left their estimate of growth in the second quarter unchanged at 1.2 per cent, an annualised rate of 5.5 per cent. The ONS said the revival in the building trade had been stronger than first thought, that investment was also higher, and that the contribution from rebuilding of stocks was less important.
But the boost to growth from trade and the 25 per cent fall in sterling since 2007 was weaker than hoped. Households' real disposable income dropped by 1.6 per cent between April and June; a 0.7 per cent rise in spending was financed by running down savings, something Charlie Bean, Deputy Governor, said this week that the Bank wanted to see in the short term.