Adam Posen: This is no time to ease up
The Business Interview: He has got his way over QE. But tough times still lie ahead, he tells Ben Chu
If Adam Posen feels a sense of satisfaction at the vindication of his judgement he is doing a good job of concealing it. The external member of the Bank of England's Monetary Policy Committee (MPC) has fought a long and lonely battle for the Bank to extend its quantitative easing programme. He first voted for an extension of monetary stimulus in October 2010. And he stuck to his position even while other members of the MPC were moving in precisely the opposite direction, towards a rise in interest rates, in February.
But last month the Posen view prevailed in spectacular fashion following a deluge of bad economic data over the summer. The MPC surprised financial markets by voting, unanimously, to increase QE by £75bn, which was even more than the £50bn that Mr Posen had been voting for. The Bank had whipped out its own "big bazooka".
Yet rather than expressing pleasure at finally winning his argument, Mr Posen regrets that he wasn't able to convince his fellow committee members of the virtues of his case for more QE sooner. "I wish I had been more persuasive earlier," he told The Independent on a trip to Hampshire this week to speak to local businesses leaders and visit the Stannah factory in Andover. "If we'd done £50bn six months ago, the economy might now have been in a stronger shape," he said, before adding: "I'm glad that the committee has decided to recognise that the British economy is cratering and we have a responsibility to do something about it."
As the phrase "cratering" suggests, Mr Posen's analysis of the state of the economy is not on the optimistic end of the spectrum. Although he thinks that the QE decision should help to prevent a double dip-recession, he does not see growth recovering until 2013 at the earliest. "Roughly I'm saying 0.5 or below for 2011 and 0.5 or above for 2012," he said. The latter figure is very low, well below most private sector forecasts and only a fifth of the 2.5 per cent growth predicted by the Office for Budgetary Responsibility in March.
If Mr Posen is correct, much economic pain lies in store for the British public. "The outlook on living standards is pretty grim, there's just no denying it," he admits. That, however, seems to conflict with the message of Sir Mervyn King, the Governor of the Bank of England, who suggested earlier this month that Britain is "past the worst" in terms of the squeeze on incomes. Mr Posen explains the dissonance by pointing out that the Governor was describing how people should benefit next year from falling inflation. But it's clear that he remains significantly more bearish on the growth outlook than other Bank policymakers.
Inflation, however, rather than growth, is the MPC's official target. And an increasingly vociferous band of critics accuse the Bank of losing the plot on prices, citing the fact that consumer price inflation in September breached 5 per cent. Mr Posen, though, is adamant that prices will come down sharply next year because tax changes and oil price increases that affected the numbers in 2011 will not be repeated: "It's essentially arithmetic that when VAT falls out, the CPI inflation will drop 1 per cent. It's essentially arithmetic that if commodity prices stay where they are or fall we will unwind some of the stuff we got last year. That already takes you down 1.5 per cent." The slowing economy, he argues, will do the rest, to the extent that the greater danger over the medium term is undershooting the Bank's 2 per cent target.
Yet Mr Posen admits that inflation has held up, so far, more than he expected. He ascribes this primarily to the behaviour of the big six power firms: "The exact timing and height of the peak came out because Ofgem decided to let a bunch of energy companies raise rates. That means the peak was a little over 5 per cent and the peak was in October instead of August. It matters to people, but it's nothing that really affects our policy. Nor should it."
The darkest shadow that falls over the British economy is, of course, the eurozone crisis. And Mr Posen is not expecting a rapid resolution there, no matter what emerges from this latest Brussels summit. He regards the situation as a straight bargain between the Greeks and the Germans about where the losses of bad lending to Athens will fall. And he is sceptical about the plan to turn the European bailout fund into an insurance scheme. "An insurance scheme doesn't work, because you're not building up premia ahead of something happening," he says. "The loss is already there. The money is gone."
Mr Posen argues that the European Central Bank has been remiss in failing to buy up the bonds of solvent European nations such as Italy and Spain that have come under pressure in the capital markets. "An independent central bank can constructively work with elected governments and should not be afraid to buy bonds in the secondary market when economic conditions require it," he says. And he dismisses the concern often raised by German politicians and economists that bond buying by the ECB will inevitably prove inflationary. "In a non-inflationary environment with downside risk, with illiquidity in bond markets that should have liquidity, it is right and reasonable for a central bank to act – especially against a backdrop of fiscal austerity."
Fiscal austerity in the UK is the policy that dare not speak its name as far as most members of the MPC are concerned. No one wants to provoke a row with the Treasury. And Mr Posen is no different. He states candidly that it is up to elected politicians to decide levels of tightening and for monetary policymakers like him to deal with what he calls the "prevailing conditions" that this creates.
He does, however, make the point that "in the short run contractionary fiscal policy is contractionary, whatever its long-run virtues". And he rejects the idea that the UK's fiscal condition is remotely comparable to that of Greece, despite what excitable commentators have suggested.
"If somebody tells you to quit smoking you'll save £50 a month and you'll live longer," he says. "That will have benefits if you're smoking. The person who never smokes simply avoids the heightened risk. The UK never smoked – or at least hasn't smoked in 30 years. Greece is a four-pack-a-day smoker. Greece has to kick the habit; we just have to stay on the wagon."
There is certainly no doubt about the way Mr Posen will vote at future MPC meetings if the economy looks to be heading even deeper into the crater.
The CV: Adam Posen
* Joined the Bank of England's Monetary Policy Committee on 1 September 2009. His three-year term expires at the end of August 2012, but can be renewed once.
* Author or co-author of six books and numerous articles, including studies of inflation targeting, the Japanese economy, the economic impact of asset price bubbles, and central bank independence.
* Born in Boston in 1966. He earned a PhD in political economy at Harvard.
* A visiting scholar and consultant at central banks worldwide prior to joining the Bank of England, including at the Federal Reserve Board, the European Central Bank and the Deutsche Bundesbank. He has also been a consultant to the European Commission, Japan, the UK and the IMF.
* He has many admirers among Keynesian economists. Paul Krugman once said: "People should be reading Adam Posen."
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