O’Neill Says U.K., U.S. Economies Need More Targeted Action

Goldman Sach's Jim O'Neill
Jim O'Neill, chairman of Goldman Sachs Asset Management. Photographer: Chris Ratcliffe/Bloomberg

Goldman Sachs Asset Management Chairman Jim O’Neill said conventional quantitative easing may not be enough for the U.S. and U.K. economies and more “targeted” policies are needed to boost confidence and growth.

“It’s not obvious to me that conventional QE in the U.K. or the U.S. has got that much bang for its buck,” O’Neill said in an interview with Maryam Nemazee on Bloomberg Television’s “The Pulse” program in London today. “More imaginative QE or forms of specific targeted easing, probably involving more infrastructure or doing something to get bank funding spreads down, would be more likely to get a stronger result.”

His comments were echoed by former Bank of England policy maker Sushil Wadhwani, who said today that global central banks need to do “more creative” forms of monetary policy to prevent the global economy slipping into a recession.

The Bank of England restarted asset purchases last week, its first expansion of policy since 2009, citing risks to the recovery from the euro-area debt crisis, while data today showed the unemployment rate rose to the highest since 1996 in the quarter through August. In the U.S., the Federal Reserve announced last month an operation to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries, aiming to reduce borrowing costs and spur the recovery.

Less Impact

The Bank of England’s new stimulus “will have less effect this time than it did last time,” former Bank of England policy maker Charles Goodhart said on Bloomberg Television’s “Last Word” with Andrea Catherwood today. “The real problem isn’t the level of official interest rates, but it’s the difficulties the banks have in getting funding and the spreads the banks charge.”

He said there is a “very strong case” for trying to provide more assistance to small businesses and first-time home buyers. Referring to Chancellor of the Exchequer George Osborne’s credit-easing proposal, he said “more innovative ways” to help boost credit are necessary.

Wadhwani, founder of Wadhwani Asset Management LLP, said global policy makers need to do three things “if they are to prevent a relapse,”

“First, they need to get firms better access to credit,” he said in an e-mailed note co-written with Michael Dicks. “Second, they need to help boost demand. And, third, they need to deal with the euro crisis.”

Direct Approach

Wadhwani recommended U.K. authorities take a more direct approach to boosting demand by issuing every adult a voucher that can be spent in the next three months. That is “surely a more effective form of quantitative easing” than the central bank buying gilts, he said.

He also said the U.K. and the U.S. can’t “play the innocent bystander and plead with Europe to sort out its mess.”

“Better surely to recognize both the global scale of the problem and the political constraints that are currently limiting European policy makers’ room for manoeuvre, and act in accordance,” he said.

The U.K. unemployment data also showed that jobless claims rose 17,500 in September, a seventh straight increase. Prime Minister David Cameron said the figures were “very disappointing,” adding that the government won’t abandon its budget-reduction plan.

“I think it would be a dangerous thing to rule out” the U.K. economy deteriorating further “given what the evidence is showing,” O’Neill said. “It might be because of the fiscal tightening that is coming home to roost.”

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