Quantitative Easing (Economic Affairs Committee Report)

Baroness Kramer Excerpts

Monday 15th November 2021 Grand Committee

[Baroness Kramer (LD)]

My Lords, I am so glad that I am not the Minister. If the noble Lord, Lord Lamont, is the amateur, I am afraid that I am back in primary school. I know how to lend you money and make very sure you pay it back to me, but I am not an economist by training, as will become very evident. That leads me to thank in particular the staff to the committee, who took people like me by the hand and through this incredibly complex topic. I also want to thank our chairman, the noble Lord, Lord Forsyth, because this report is a good example of a willingness to speak truth to power and to hold the powerful accountable to Parliament, which is at the core of what we do. I suspect that this report, because it is so challenging, deals with such complexity and is so critical, will be one of the most used and most remembered of the reports that the Economic Affairs Committee has brought forward.

There have been many comments about the contents of the report, and they tended to echo one another, so I shall focus on the issues that most exercised me. I was somewhat tempted to take apart the replies that came from the Bank of England and the Treasury, which were both inadequate to the circumstance. I hope that, in future committees and in various other venues, they will be held to account and required to answer fully and properly, because this issue matters greatly.

I take the position, as I think do many—not all of us but many—that QE is a powerful and appropriate tool in times of panic in the financial markets, especially when liquidity is compromised. To my mind, the Bank was absolutely right and very much on target in using QE in the immediate aftermath of the 2008 financial crisis, when the banking system seized up almost completely, and again in the spring of 2020, when Covid undermined market confidence and, frankly, the Treasury was uncertain that it could complete its gilts issue.

But throughout the whole time that we have been working on this report we have heard evidence that makes it clear that QE is not a solution for general economic woes and, particularly, that it does not drive growth. The noble Lord, Lord Sikka, and I often do not see things in exactly the same way, but it seems to me absolutely self-evident that, in the period following the 2009 crash, when QE was almost constantly in play, we did not see growth coming through in the economy—those numbers have not been there. Even though I cannot describe and explain all the various mechanisms and why they worked or did not, I can see the end result and it seems to be a lesson that we have to learn.

I can understand that people might have thought that QE would contribute to growth because—and I pick up the issue raised by the noble Lord, Lord Davies —it tended to push investors along the yield curve and to take greater risk, but, again, we did not see the output of that. This is the UK. When people are forced to move their money into riskier assets, they turn towards property once again, rather than putting it into the productive economy.

I am concerned by the asset inflation that happened —we have talked about that extensively—which benefited primarily the existing asset-rich. In this country, the last thing we need is more unequal distribution, creating real political tension, not just in the narrow sense but in the broad sense of wider political stability.

I am also concerned that, because QE by definition converts fixed-rate debt to floating-rate debt, it can significantly drive up the cost of servicing public service net debt in times of rising interest rates. There will be inevitable fiscal consequences to that, and I wonder whether the Minister might talk about them when he replies.

If we accept that much of the current accumulation of QE did not particularly benefit the economy, the independence of the Bank of England comes into play. Many people take the view that the MPC’s recent decision not to raise interest rates was in large part influenced by its concern about the level of QE. As several speakers have said, including the noble Baroness, Lady Morrissey, and the noble Lords, Lord Forsyth and Lord Griffiths, inflation is now anticipated to go over 5% for a prolonged period; there is no definitive evidence that it will be only short term and temporary. When one looks ahead at the appalling GDP growth rate, which was part of the OBR forecast in the Budget, that combined with those inflationary pressures could lead us into stagflation. That is a situation that none of us wishes to see and which could fundamentally undermine the economy.

I join others in asking the question: can QE ever really be unwound? I take very much to heart Dr El-Erian’s evidence to us, when he said that there was no exit paradigm. My fear again is that it is another case of “Events happen, dear boy”. Have we broken a tool by using QE over and over, in inappropriate circumstances, and building up the size of the asset purchase facility? Have we broken a tool that we might need in the next financial crisis—and if it is not available to us then, what will the consequences be?

I want to pick up on an issue raised by the noble Lord, Lord Lamont. Perhaps the Minister could explain why the asset purchase facility was not included in the public sector net debt calculations at the time of the Budget. I tried to work my way through the OBR’s explanation, but it seemed to me that it left a distorted picture of the UK’s liabilities. I rather liken it to the distortion of a lot of the off-balance-sheet financing that we have seen in the past—PFI being one example—which eventually comes back to haunt the taxpayer. In our report, the committee bent over backwards, as the noble Lord, Lord Monks, said, to say that, despite the various perceptions, we accepted that the Bank of England was not using QE to fund the Budget deficit, but the decision not to include the APF in the PSND makes a convincing case that the OBR saw this as budget financing. Could the Minister respond to that issue?

We live in fast-changing times and it is very possible that fiat digital currencies, the subject of our next report, and stablecoins will fundamentally change the monetary landscape. A retail CBDC, as many have pointed out, would for example make helicopter money very easy. We need to understand the effect of QE and its purpose. The noble Lord, Lord Bridges, raised all the relevant points and they are deeply embedded in this report, but we need to get the answers. I think that we would all concede that there is a great deal more work to do, but I feel privileged to have been part of the work that the committee has done.