QE2: Pass the Parcel Redux

Blimey: Mason has explained it in a way even I can understand. Hard to believe he was originally a musical academic.

My precis: basically the Western financial system remains sitting on a time bomb of unacknowledged (i.e. unwritten off) debt. Quantitative Easing is a potential path - actually, the only potential path - out of this. But with that comes the real possibility of other bad stuff. Not inflation - suddenly, that's not the Big Bad Wolf any more (well, not for the moment) - but stagflation and, as seems to be already starting, a currency war. Oh, and no one can explain why QE might work.

But QE isn't enough on its own:

"There needs to be a defibrillating moment where ... large amounts of bad debt are written off in the private sector - above all in the housing market. Then consumers suddenly get access to credit again and then the big cash mountains of the private sector get thrown into the economy in the form of investment.

But for that to happen somebody has to take losses who has not already taken them. That means the banks: they have to take the big hit on mortgages and commercial property they have refused to take; that in turn hits the government, which in the US and UK has "guaranteed the losses" on hundreds of billions of bad debt for the cost of a few tens of billions.....

On top of that, once the final cathartic moment is over, the central banks then have to get out of money printing in an orderly way, allowing quite a bit of inflation to avoid choking off the recovery. One way to do this would be to temporarily abandon inflation targeting - to say: we will keep printing money whatever happens to inflation, until growth reaches a set target and stays there. Bernanke has toyed with this, and it will be interesting to see if he keeps the idea alive.....

QE2 will buy time. But in that time the governments have to act at micro-level to restructure the finance system so that it starts working again."

I think he's saying its time for another round of pass the parcel: when the music stops, someone is going to have huge losses in their hands. Mason says it has to be the bankers if this QE thing is to work - but this government seems to want it to be everybody else.