Introduction
One of the City of London’s most respected economists, Roger Bootle now runs his own consultancy, Capital Economics, which specializes in macroeconomics and the economics of the property market. He is also Economic Adviser to Deloitte & Touche, and a Specialist Adviser to the House of Commons Treasury Committee. He was formerly Group Chief Economist of the HSBC Group and, before the change of government, he was a member of the former Chancellor’s panel of Independent Economic Advisers, the so-called “Wise Men.”
Roger Bootle studied at Oxford University and then became a Lecturer in Economics at St Anne’s College, Oxford. Most of his subsequent career has been spent in the City of London.
He has written many articles and books on monetary economics. The Death of Inflation was published in 1996 and became a best-seller, translated into nine languages. Initially dismissed as extreme, this book is now widely recognized as prophetic. His next book, Money for Nothing, was widely acclaimed. It anticipated much of the current crisis. His latest book, The Trouble with Markets, is due out later this year.
A regular columnist on the Daily Telegraph, Roger also appears frequently on national television and radio.
What Policymakers Should Do
At the start of 2009 the world economy was at a crossroads. There is a real danger that the current recession will evolve into a downturn similar in depth and length to that of the Great Depression of the 1930s. To avoid such an outcome, there are six things which policymakers should do—and one thing that they should avoid at all costs.
First, policymakers need to maintain very low interest rates and they should take further steps to reduce longer-term rates of interest, principally the yield on government bonds, first by keeping official interest rates low for a very long time and second by buying government bonds, and, if need be, private securities.
Once short-term interest rates have reached zero, conventional monetary policy has reached the end of the road, but that does not mean that monetary policy has shot its bolt. In particular, central bank purchases of assets, so-called quantitative easing can continue without limit. To get the desired result, central banks need to declare to the markets that they are prepared, if necessary, to continue with the policy without limit. The more this message is believed, the less they will have to do.
Second, some governments need to invoke the ghost of Keynes and implement large expansionary fiscal policies. Again, global policymakers have already put in place fiscal packages.
But these measures are not large enough. To be really effective, policymakers must give the impression that they will do whatever it takes to lift aggregate demand. If they succeed, then they will have to do comparatively little. Small measures, which do not bring about this result, could be next to useless. Indeed, a succession of footling measures, which leave the private sector with the impression that, after trying this succession, the state had given all it has got, could actually make matters worse. The problem is that public debt is now so high in some countries – the UK, for instance – that they do not have much scope to do a lot more. But two key countries – China and Germany – have lots of scope. They need to act.
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