02/03/2012 14:17 GMT

Vince Cable: QE Consequences 'Very Imperfectly Understood'

The consequences of injecting massive amounts of new cash into the economy to stave off a depression are only "very imperfectly understood", the Business Secretary has said.

Speaking at the Liberal Democrats spring conference in Inverness on Friday, Vince Cable described quantitative easing as "unorthodox", and "an experiment" which the Government does "not know where it will lead".

He said: "Quantitative easing is a kind of new, unorthodox way of running monetary policy and it stems from the experience of the 1930s when one of the factors that was notable in the great depression, which was certainly worse than the many previous, was the fact that the money supply drastically contracted.

"So when we had this major crisis three years ago there was an understanding that to counter that, the Federal Reserve, the Japanese, the UK, and latterly the European Central Bank realised that they had to create money - others use the expression 'printing money' but that is not quite what is involved here - to expand the money supply in order to prevent us going into a great and deep recession.

"Now the technique that is actually utilised is that the Bank of England creates cash and puts it into the financial institutions by buying bonds from them.

"It pumps liquidity - cash - into the system in the hope that it will find its way into the wider economy and free up investment and so on.

"This is an experiment. We don't know where it is going to lead. So far it has almost certainly headed off a very deep depression. It has almost certainly been one of the factors pushing down the Sterling exchange rate.

"But its wider consequences, whether this will lead to inflation, the wider impacts on bank lending, these are things that are only very, very imperfectly understood.

"But my judgment when I was first confronted with this was that it was something that we had to try, because the alternative was probably a disaster."

Speaking after the conference, Mr Cable said a decision on the location of the new Green Investment Bank (GIB) is expected "within the next few days" pending approval by the Government.

The new institution is designed to provide investment for new green energy projects, with Edinburgh and London considered to be amongst the strongest candidates for its headquarters.

However, Mr Cable said the future of all UK institutions "would be questioned" if Scotland voted for independence.

He said: "There are a whole lot of UK institutions (in Scotland) already.

"A few weeks ago I established the Glasgow headquarters of a UK-wide centre for work on renewable energy technologies, and it's a collaboration between Glasgow and the North East of England - English and Scottish universities.

"So if you had independence the future of all of those institutions would be questioned.

"There's nothing specific about the GIB, and we're judging the location on its merits."

On whether the future of an Edinburgh-based GIB would be in doubt after independence, Mr Cable said: "We're dealing with double hypotheticals here. You are assuming it's coming to Edinburgh and you are assuming there will be independence.

"The first we haven't decided on, and independence is improbable.

"There are a whole lot of UK institutions about which this question could be asked, and there's nothing specific to the GIB.

"So we're working on the operating assumption in all of these decisions that the UK will continue."