Fiscal and monetary policy for the post-Brexit world

We first explain how central banks have made a complete mess of monetary policy over the Financial Crisis. Their first major mistake was to stimulate a big credit boom in the 2000s, which was the main cause of the crisis situation, through over-leveraged banks. Second, they permitted the Lehman liquidity crisis, by allowing Lehman to go bust, instead of getting it taken over, with liquidity pumped into the banking system; it was this bust that precipitated the crisis proper. Third, they stymied bank credit growth post-crisis by draconian bank regulation just when credit growth was needed for recovery. Fourth, they flooded markets with Quantitative Easing (QE, the aggressive buying by central banks of bonds and other assets by printing money), which has created large distortions in financial markets. There is now evidence that this last episode, zero interest rates and QE, have damaged competition and new industrial entry by subsidising capital to large firms. This has created a market structure argument for ‘normalising monetary policy’ besides arguments from monetary policy itself, to the effect that we need to make it effective again. To restore monetary policy effectiveness we need interest rates to rise back to normal, well away from the zero lower bound where they still are. The only way for policy to deliver this is via a fiscal expansion. This can be Brexit-related, focused on using the much-improved public finance situation to deliver tax cuts and growth-supporting spending). We set out full fiscal and debt projections over the next two decades, which show that this can be done while debt remains under control in the long term.