Wednesday, January 14, 2009

A rare central banker who understands monetary operations

Former Bank of England policy maker Charles Goodhart says that English Prime Minister Gordon Brown should “sack the U.K. Debt Management Office and refrain from issuing government bonds as a way of bolstering the economy."

“The one single thing that I would like to see, in a sense to get us out of the present problem, would be very simple,” Goodhart told lawmakers on Parliament’s Treasury Committee. “It would be: sack the Debt Management Office and just not issue gilts for quite a long time so that the huge deficit simply comes into the system in the form of increases in liquidity and increases in the money supply.”

(Not issuing securities is functionally the same as keeping a zero interest rate target.)

At least this guy understands that issuing Gilts (or Treasuries, in the case of the U.S.) is not borrowing, but merely a reserve maintenance activity. However, reserve maintenance can be accomplished by paying interest on reserves. There is no need to issue securities at all.

Read full article here.

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