Quantitative Easing (Economic Affairs Committee Report)

Lord Sikka Excerpts

Monday 15th November 2021 Grand Committee

[Lord Sikka (Lab)]

My Lords, I thank all members of the Economic Affairs Committee for their report into this vital topic. I suspect this is the beginning of many reports into this.

To me, quantitative easing is part of a welfare programme operated by the state for the benefit of corporations and the financial industry. The first big instalment was the 2007-08 bailout, which added up to £1,162 billion, consisting of £1,029 billion-worth of guarantees and a cash outlay of £133 billion. The next instalment was £895 billion-worth of quantitative easing.

Today, the Bank of England holds corporate bonds issued by tax abusers, such as Apple, Rio Tinto and Thames Water. It also holds corporate bonds issued by entities that have a minimal presence in the UK. These include US telecom companies Verizon and AT&T. There is no convincing explanation from the Bank of England for its choice of these corporate bonds.

Central bankers are now handing out large sums of money to private banks and speculators to create endless opportunities for market manipulations and asset bubbles, but without adequate checks, balances, controls, safeguards and accountability. Through QE, the Government have rewarded the banks, financial markets and speculators that caused the 2007-08 crash and are still involved in numerous scandals. A combination of ultra-low interest rates and vast monetary expansion has encouraged speculation at an epic scale, where gamblers are basically using public money to create bubbles in the housing, securities, commodities and other markets.

The Bank of England’s October 2021 financial stability report says,

“the prices of some financial assets appear high relative to historical norms.”

So what will the Government do when the asset bubble pops? With a vast amount of QE, low interest rates, record government debt, record levels of taxation and never-ending austerity, they will have little room to manoeuvre. I hope the Minister will be candid today and offer us his analysis of where we are heading with QE.

Successive Governments have boosted liquidity in the financial markets, which has enriched holders of marketable securities, as others have said, but there is little tangible benefit to ordinary people. There has been no trickle-down. More people are living in poverty and reliant on food banks than ever before. Wages have barely exceeded pre-crash levels. Even as stock markets gained from QE, it did not really benefit Brits. Only 13.5% of UK-listed company shares are held by UK-resident individuals; 54.9% of shares are held by individuals resident abroad. Who has actually become richer from this vast expansion of QE?

QE and low interest rates have also caused a debt explosion, as households, corporations and financial institutions have taken on more debt, which dwarfs the level of government debt. Rather than investing in real assets, corporations are investing in the QE-driven financial market because it is offering higher returns. The Bank of England’s July 2021 financial stability report warned that the rising levels of debt pose a growing threat to the UK economy.

QE has not delivered economic renaissance but has helped to widen economic inequalities, as has been mentioned. Again, it will be helpful to see the Government’s analysis of the distributional effects of QE, although I note that the Bank of England is somewhat reluctant to do so.

Much of the money released by QE has been used to shore up bank balance sheets. A large part has also escaped into shadow banks, such as private equity and hedge funds—a sector that is now as big as retail banking, if not bigger, and is posing new dangers, especially as it is not regulated. There are no capital adequacy requirements or stress tests on their balance sheets.

Banks have not used the QE money to support businesses or hard-pressed households. Pre-Covid statistics show that lending to businesses has remained stagnant. In the post-Covid world of government loans, a recent survey—barely three weeks ago—showed that more than half of small and medium-sized enterprises say that they are holding back from investing to grow for the future as funds are taken up by debt repayments. Banks are not stepping up to support SMEs at all. In the era of QE, low interest rates, low corporate tax rates and low inflation, we have not seen any great investment in productive assets in the UK, either. The UK invests around 16.9% of its GDP in productive assets, compared to the average of 20.1% in the EU countries. Among major European countries, only Greece and Portugal have invested less.

QE should have been people-centred and used directly to improve people’s lives. Just imagine what we could have done if £895 billion of QE had been used for the green new deal, building social infrastructure, creating energy self-reliance, clearing slums, writing off debts for graduates, starting production of generic drugs to prevent abuses by pharmaceutical companies, and much more. Life would have been transformed.

That is not what the Government chose to do. Instead, they chose to give money to speculators. QE did not cause an increase in inflation, as we have heard, so using it to rebuild the economy and help hard-pressed households perhaps would not have caused inflation either, but we would have had an entirely different country from what we have today.

Finally, QE has sent a signal to the finance industry that, no matter how reckless it is, the state will always come to its aid. We have handed it an £895 billion subsidy, which has not only seen the bankers avoid punishment for numerous scandals but actually entrenched their financial advantage even more. Is that fair?