A tale of two experts

Congdon versus Halligan, Quantitative Easing, who's right?

Tim Congdon Tim Congdon
The problem here is that the position we have taken in the past with 'experts'is to condemn them. The experts who predict our imminent demise due to climate change are cheats and, it would appear, do this for some very strange reasons. But the subject under the spotlight here is economics. So this is not so much a condemnation as an analysis.

First of all Tim Congdon is a eurosceptic, he's no lightweight either. Unlike many politicians who have no life/work experience outside of the Westminster bubble, Congdon has worked in the City of London as an economist. He formed his own company, Lombard Street Research, to offer in-depth economic data to interested parties. He has also been an academic and part of the HM Treasury's panel of independent economic forecasters. He is perhaps more of an economist than a journalist.

Liam Halligan is also a eurosceptic who has worked and strayed beyond the Westminster boundary. He has worked in Moscow as the co-founder of an economics data organisation. After some time he returned to the UK to work as an economics correspondent for TV and numerous newspapers. However, there's more to life than opinions and Halligan co-founded Prosperity Capital Management, eventually to become its Chief Economist. Even so it might be true to say Halligan is more known as a journalist than an economist!

Congdon versus Halligan is related to their differing views on Quantitative Easing. From the start of QE Congdon has said "it will work". This might be true, depending on what you define as the objective, what is not implicit is either whole-hearted support or condemnation. In his article Critical Reaction, 'Germany Shows How To Do It', Congdon highlights the good points of German economic policy in these difficult times. He also makes plain the risks of economic intervention leading to inflation. It's worth reading his article because it goes a long way to explaining the latter part, the current reasonable health, of the German economic miracle. The man-in-the-street has a need to understand the 'success' of Germany and the failure of the PIGS: Portugal, Ireland, Greece and Spain.
Liam Halligan Liam Halligan
Congdon makes it plain that the 'trick' behind the German borrowing method, the government borrows from commercial banks, is within the rules laid down by EU treaties; the reader may wonder if this is by accident or design. Congdon also explains why it has worked in this case but would not work for other countries. For what the Germans have done is aggregate this borrowing with all other industrial activity. This enables Germany to present itself as 'doing well' and so allow Angela Merkel to get on her high-horse and hector other countries about their failure. Some observers, like Halligan, might see this borrowing trick as a fake just like QE. What Congdon also does is criticise Halligan -

The Bank’s QE exercise has been very controversial, not least because it has mischaracterised as ‘money printing,’ with commentators like Liam Halligan condemning it as inflationary. The controversy has arisen at least partly because the ballooning of its balance sheet has implications for the Bank of England’s size and constitutional role.

As far as can be seen Congdon named Halligan first, now why should that be? Halligan, naturally, saw he had the right of reply in the Telegraph, the newspaper for which Halligan writes. He doubts the assertion by Congdon that the rise in money supply is under control -

Critiquing my use of the term "money-printing", Congdon highlights that the nominal value of notes in circulation in the UK has risen only 2pc since early 2009. This is disingenuous. Everyone arguing against QE, at least everyone serious, has been careful to describe it as the expansion of "virtual" or "electronically-created" credits ex nihilo by central banks – as I did

So if the German method of borrowing is a trick and the QE method virtual, we may have to mark them both down, not just one, as being a fake. So what happens to these credits? Halligan goes on -

Such credits are then used (1) to buy Treasury bills from cash-strapped governments and/or (2) bombed out debt instruments from struggling banks – who can then spend them, or not, as they wish.So the Bank of England has created the means to spend, from nothing, despite not issuing more physical notes. To say that QE isn't money-printing is a distinction that would make even Bill Clinton blush.

Note also how in the German method the money borrowed goes from the banks to the government and with QE's destination (1) 'Such credits are then used to buy Treasury bills from cash-strapped governments'. Aha! Says the man-in-the-street, they are both the same, so how can one be virtuous and the other not? Up to a point man-in-the-street, up to a point. For with QE, as Halligan explains the final destination of the money is a little murkier and opaque as with destination (2) and/or bombed out debt instruments from struggling banks – who can then spend them, or not, as they wish.

And therein lies the problem. Halligan has been very forceful on the subject of bombed out banks. He has bemoaned the way in which they hide their debts and praised the Irish banks for, a long time back, 'fessing up' to their responsibilities. He was also quick to condemn the Germans, who like all other EU countries have not, but despite this took upon themselves the job of lecturing the Irish, as Angela Merkel and her Ministers did, when the Irish financial situation imploded. The problem with QE is it's hard to control, and why should anyone trust the banks any more? Halligan explains his side of the argument well, on the banks he says -

Many of our banks are still concealing vast sub-prime losses in off-balance-sheet vehicles – the so-called "shadow banking system". So they assume other banks are doing the same. Such mistrust between the banks – "we're lying, so they must be lying" etc –

It's a mad world in which we live. On the subject of race relations if a person thinks they are a victim of a race crime then the authorities must assume this to be so, real evidence is secondary. Back to our man-in-the-street, now if he thinks QE is wrong and dangerous why not just accept this to be so? After all it is our man who is the plankton upon which the bigger bigger fish feed. Our man has paid dearly so the banks can survive. Further proof of madness, if it be required is that the head of bombed out bank RBS will get a bonus of nearly £7 million.

Footnote - For more on Ireland and the way banks work see HERE and HERE.