In a radical and risky move, the Bank of England today decided to start printing money to combat the economic crisis, according to the London Times. While this might be good news to workers at the Treasury print shop, doesn't running of sheets of new cash traditionally send inflation soaring?
According to an article by the Times' economics editor, Gary Duncan, and Grainne Gilmore, the plan is "fraught with uncertainties and risks. Since the measures have been used only rarely in past decades, and the economy has since gone through sweeping changes, as well as recent upheavals, the Bank cannot be sure how much money it needs to create to make a difference."
The Bank has labeled the strategy “quantitative easing," and plans to pump £75 billion of newly created money into the economy over three months, according to the Times. "The ground-breaking step came as the Bank’s rate-setting Monetary Policy Committee also pushed interest rates to yet another historic low."
It's a little more complicated than just "printing money." According to the Times, the bank will actually begin buying—from commercial banks—a range of corporate bonds and Treasury gilt-edged stock or “gilts." The Bank will pay for these assets by creating new money, electronically, in "a modern-day version of running its printing presses."
The new cash paid to the banks for these assets will be credited to their Bank of England accounts. The idea is that banks will then make new loans to businesses and consumers backed by this increased funding.
The Times notes that "the Bank’s intervention in the markets will also be carefully designed to drive down commercial interest rates paid by consumers and borrowers, as well as by the government on official borrowing, delivering a further boost aimed at breathing life into the economy."
Should the U.S. take note of this new policy by England and follow suit, or is this a classic case of mismanagement triggered by financial panic? Email us reasons why it does or does not make sense to print money in a recession.