Wednesday, February 24, 2010

Was Mervyn King in yesterday's lecture?

Mervyn King is a powerful man: He's the governor of the Bank of England, the UK's central bank. Recall we learnt about central banks briefly this week: They oversee the financial system, even though they don't directly regulate it (the FSA does that).

Part of that program of oversight saw a lengthy period of quantitative easing, which was basically buying different types of securities (we've learnt about some of these, many of which are bits of paper saying IOU), so that more money entered the system (the amount the Bank paid for the securities). This is a simple increase in the monetary base, and the hope of course was that banks would start lending again, to get the economy going (recall, if we want export led growth, exporting firms need to be able to borrow to expand in order to export!).

That stopped recently, but yesterday Mervyn King announced it might have to begin again, because things aren't looking so rosy. Note in the article the effect of this announcement: The exchange rate fell against the dollar and euro. We talked about this yesterday. Expectations of a rising supply of money in the UK means an expectation of a falling exchange rate, and hence those people that hold money for speculatory purposes (remember the speculatory demand for money) sold pounds quickly, expecting this to happen. They may have bought them back now, and hence have more pounds because they sold, held the money speculatively, and then bought pounds back.

There's so much in the linked Guardian article related to what we've been learning this week and throughout this term, I couldn't recommended having a quick skim read any higher, and also yesterday Vince Cable, leader of the Lib Dems, criticised banks for not having begun lending to people (mainly small businesses), despite the public money they've received. This is exactly the money multiplier process in action: The Lib Dems are saying it's too small because banks are still not behaving properly, and we could do with a higher multiplier to help the economy get going.

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