Quantitative Easing

George Kerevan Excerpts

Thursday 15th September 2016 Commons Chamber

[George Kerevan (East Lothian) (SNP)]

We are a small but enthusiastic band this afternoon, but it strikes me that there is something serious here. For the last eight years, the entire western world has been undertaking the most extraordinary monetary experiment in 100 years. If it goes wrong, as pointed out by the hon. Member for Wycombe (Mr Baker), the consequences will be devastating for the world economy. We may find that all we did in 2008 was delay the explosion of the world’s economy. It is that serious. I hope that the Bank of England and the regulatory authorities are watching via the camera lenses around the Chamber. This debate should not be seen as an attack on the Bank of England, however. There was an emergency in 2008 and the Federal Reserve and the Bank of England stepped in, and quantitative easing was an interesting device—an emergency brake on the banking crisis. As hon. Members have said, eight years on we should be looking at what else needs to be done.

To use a homely analogy that I hope the technical experts in the Chamber will not blanch at, in 2008 there was a fire in the financial system and we used a high-pressure hose called quantitative easing. Once the fire dampens down, if we keep on using the hose and hose everything in case the fire comes back up, we destroy everything in the house. If we look at the unintended consequences of QE, it is contributing to global deflation. There is inflation in parts, bubbling up through the system, but we have had deflation, which attacks the incentive to invest. We are destroying the propensity to save by bringing interest rates down to near zero. We are destroying bank profits. Has anyone looked at bank share prices over the past couple of years? We saved the banks in 2008 only to destroy their business model through the unintended consequences of QE. Who is going to do something about that?

If we do not do something about it, we will be into another banking crisis of a different kind. In the last two rounds of QE, in the EU and Japan, over the past 12 months, we have started a process of competitive devaluations. We are back to the 1930s; everyone’s response is, “Let’s devalue the currency. That will help our exports.” Once everyone does it, we are in the 1930s situation of beggar-my-neighbour, which inevitably leads to all sorts of political tensions. The Chinese Government are at the moment saying that they are not devaluing, but they are privately devaluing, as we can see if we look at what is happening in the international markets. Exchange rate competition is a dangerous, toxic thing, and it is a direct flow from what QE is now being used for.

As the hon. Member for Wycombe pointed out, the whole process has grossly distorted asset prices, so that when we unwind, it will be a case of, “Who knows what we have been investing in, and whether it has been the right thing or the wrong thing?” There has been discussion about house prices, but it is clear that a series of industrial investments and other kinds of investment could be seen to be the wrong ones once prices rebalance, which of course is making people nervous.

It is rare for me to do this, but I will disagree gently with the hon. Member for Bishop Auckland (Helen Goodman), because I do not think it is a question of using QE for something else in a better way. If we look at the Bank of England’s recent announcement of the £10 billion it is trying to put into company paper, we see that it has chosen 300 companies’ bonds in which it is considering investing this money over the next 18 months. What bonds was it choosing? The Bank of England said it was those of companies that had made

“a material contribution to the UK economy”.

Let me read out the names of some of the companies whose corporate paper the Bank of England is planning to put that £10 billion into. They include: Apple; AT&T; McDonald’s; Pepsi—not Coke, but Pepsi; Proctor & Gamble; UPS; Verizon; and Walmart. We are funding Wall Street. What about the EU? We are supposed to be pulling out of the EU, with Brexit. The Bank’s list includes BMW, Daimler, Deutsche Bahn, Deutsche Telekom, E.ON and Siemens. There are also some fabulous entrants: Moët Hennessy is on the Governor’s list, so the champagne is all right. Even EDF—

[Helen Goodman]

I agree with the hon. Gentleman that the Bank’s definition of “material contribution to the British economy” is inadequate. Like him, I do not think it is very helpful to be investing in fizzy drinks, but we do need to acknowledge that Siemens has a fantastic development in east Yorkshire and that that is good; that is a proper contribution. I do not think he is really arguing against me—

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Come on, sit down.

[George Kerevan]

I take the hon. Lady’s point, but underlining what I am saying is the fact that only six British manufacturing export companies are on the list of those 300 bonds that the Bank of England thinks are quality enough to invest in. The whole thing that undermines the trajectory of QE is that it is concentrated on saving a banking system at the expense of our manufacturing system.

What do we do next? We have not said enough about that. We should consider shifting the Bank of England’s targets. The inflation target is the wrong one, and we have spent years ignoring it in any case, which means the Bank has no intellectual anchor, and that raises dangers in respect of the accountability of the Bank of England. We should be looking at nominal GDP targeting, in which case the Bank or the monetary authorities would have to be looking at automatic fiscal buffers, whether we are in a recession or in boom. That brings us back to the whole question of how we rehabilitate the fiscal intervention. At some stage, we are going to have to unwind QE. We have to do that in a controlled fashion, so one thing the Bank should be looking at in any evaluation is what timetable we use. If we have a timetable for the unwinding, that will help the markets to adjust in a better fashion. There is a danger, which we might find when we start to unwind, that the natural rate of interest has fallen so low that monetary policy has been undermined in a historic or generational sense, which again means we have to look seriously at how we combine fiscal policy with monetary policy. It would be unwise to unwind QE in the UK alone. What we should consider is a concerted international approach, which must involve some of the surplus countries such as Germany using their trade surpluses in a controlled fashion to boost consumption.

In the autumn statement, it is incumbent on the Government not to leave all the heavy lifting to the Bank of England. It is time that the Government made an intervention in a strong fiscal policy to allow the transition from QE.