Quantitative Easing

Ian Blackford Excerpts

Thursday 15th September 2016 Commons Chamber

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

I beg to move,

That this House calls on the Bank of England to provide a detailed analysis of the effect of its quantitative easing programme on the financial markets and the wider economy which includes an assessment of the future development of the quantitative easing programme and other monetary policy measures it may consider appropriate to achieve its objectives.

I draw the attention of the House to my entry in the Register of Members’ Financial Interests.

I understand the motivation to introduce the quantitative easing programme back in March 2009. The need to restore confidence and take action to stimulate lending and growth after the financial crisis was well understood. As QE was put in place, many commentators were worried about unfounded risks of inflation, which betrayed an ignorance of what the effects of QE would be.

My primary concern about the Bank of England’s QE programme, the asset purchase scheme, was not that it might lead to some kind of hyperinflation, but instead that it would not necessarily lead to an increase in lending. That was the evidence from Japan, where for a significant period after the introduction of its unconventional monetary policy, lending actually fell. Of course, that outcome has been mirrored here. If we look at M4—also referred to as broad money—its value in January 2010 was £2,220 billion. The figure for July 2016 was £2,210 billion—a slight fall in the value of broad money. Now, the improbable counter-factual is that lending might have been lower without QE; the inescapable fact, though, is that engaging in quantitative easing to the extent we have has not resulted in an increase in the money supply in the UK. It does seem that the asset purchase scheme has predominantly enhanced the balance sheets of financial institutions, without a commensurate increase in lending.

We understand the difference between QE and simply printing money, which is that QE should eventually be unwound, although the mechanisms and timings are the great unknowns of today. Just to put this into context, the Bank of England now owns an eye-watering quarter of all outstanding Government debt—in effect, we have borrowed against ourselves.

When I sought the agreement of the Backbench Business Committee for this debate, it was ahead of the Bank of England announcing further measures in August to add to its QE programme. That means that this is a very timely, much-needed debate, and it is right that, seven and a half years into the QE programme, we in this House take stock of what has been achieved and, indeed, what the interaction between monetary and fiscal policy should be to deliver confidence and growth for our economy.

With the measures announced in August, the Bank of England has authorised a QE programme of £445 billion. The desire to drive down interest rates, coupled with the effect of the QE programme, has seen investors seek other, higher-yielding assets, with a commensurate increase in asset prices and a decline in yields. Given those circumstances, the financial markets have seen a great bull run. The FTSE 100 was at a level of 3,529 on 6 March 2009, ahead of the launch of the QE programme. Last night, the index closed at 6,673, representing a gain in value of 89% over the last seven and a half years. The QE programme has helped to deliver an outcome that means that those owning financial and property assets have done well—that was perhaps an unintended consequence of QE—while, on the face of it, there has been no net positive impact on growth in the money supply.

[Jeremy Quin (Horsham) (Con)]

I note what the hon. Gentleman says on the money supply. The Bank of England reports do indicate an increase in growth in the economy as a result, certainly, of the first round of QE immediately post the first financial crisis, so it may yet have had a positive impact on the level of inflation in the economy and GDP growth—clearly of benefit to us all.

[Ian Blackford]

My contention would be that we have actually had very limited reporting from the Bank of England on the actual effect of the QE programme, and we need a much more detailed analysis. I accept, of course, that there would have been some limited impact on the economy from the QE programme. I will go on to discuss whether we need to balance some of these monetary measures by taking additional fiscal measures, which may have done more to boost sustainable economic growth. That marriage of our responsibilities for monetary and fiscal policies has to be relevant to the point the hon. Gentleman made.

As the Prime Minister herself said:

“Monetary policy—in the form of super-low interest rates and quantitative easing—has helped those on the property ladder at the expense of those who can’t afford to own their own home.”

On this occasion, I agree with the Prime Minister—I do not intend to make a habit of that though.

There has to be a policy response from the Government that recognises that fiscal measures must be taken as part of a balanced approach to deliver the circumstances of sustainable growth. If we look at the growth in financial wealth, we can see the contrasting experience of those who have benefited from this wealth effect at a time that real wage growth has stagnated. We know from an analysis published by the Bank of England in 2013 that QE had boosted asset prices and that the top 5% of households owned 40% of those assets. The analysis from the Bank of England at that time estimated that the top 5% of households had become richer to the tune of £128,000 on average. QE has demonstrably exacerbated wealth disparity between rich and poor.

[Mark Field (Cities of London and Westminster) (Con)]

I would have to agree with elements of what the hon. Gentleman is saying. We have had these ultra-low interest rates and quantitative easing in place for a hell of a long time, and they have had a distorting effect along the lines that he has suggested. Does he not recognise, though, that when, in March 2009, we entered a phase of emergency interest rates and started down the road to quantitative easing, no one would have envisaged that this far down the line the British economy—indeed, more importantly, the world economy and the European economy—would be in such a state that it would be difficult for us to raise interest rates? In other words, the policy in 2009 and for the next year or two afterwards was entirely acceptable and understandable, but it was not envisaged that it would carry on for so long.

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[Ian Blackford]

I find myself agreeing with the right hon. Gentleman. As I said, we all recognise that it was a necessary step to take in 2009. I am really grateful that the Backbench Business Committee has granted this debate, because it is important to reflect on how the monetary policy initiatives that have been taken need to be balanced by other measures to make sure that we can deliver the sustainable economic growth that he mentions. We need a detailed analysis of what has happened to the £445 billion that has been invested in the asset purchase programme. As he says, given the economic circumstances we have no idea at this stage when we are likely to see that begin to unwind. Indeed, it is likely to be some years into the future.

We need to reflect on the experiences that I have discussed and be prepared to consider what we need to change in both monetary and fiscal policy in order to foster inclusiveness and fairness. We have not created circumstances where there has been a material enhancement to business confidence that has led to an increase in business investment that is necessary to drive up productivity and enhance living standards for society as a whole. Post-Brexit, much is talked about those who have been left behind. In this context, there must be an examination of QE and an assessment of alternative measures both monetary and fiscal. In my opinion, there has been a disconnect between growth in financial assets and growth in the wider economy.

There is also the issue of the impact on savers of lower interest rates, and the impact on pensions and pension savings. The difficulties experienced by the BHS pension scheme and the desire to change the arrangements for the British Steel pension scheme are just two examples of situations where there are risks to members of defined-benefit pension schemes. Today in the UK, there are about 11 million citizens in about 6,000 defined-benefit pension schemes. Figures that I obtained earlier this year suggested that the then combined deficit in defined-benefit schemes was about £384 billion, with about 600 schemes in a danger zone in terms of meeting their long-term obligations.

One of the challenges that pension schemes face is the impact of QE particularly with regard to the declining yields on Government gilts. Let me put that into context for the House. A movement in UK gilts of 50 basis points equates to an approximate increase in defined-benefits pension schemes deficit of £120 billion. When we consider that the 10-year Government bond yield was at 3.1% in March 2009 and we are at 0.5% today, we can see the scale of the challenge that pension funds have faced from the decline in yields. We have invested, if I can use that term, £445 billion in driving down yields and creating a pensions black hole, undermining in the process the attractions of savings and, in particular, pensions savings.

It is not just the impact on future income streams for pension funds, but the effect on declining annuity rates, which is of considerable concern. This effect was identified by the Treasury Committee in a report of 2012 which stated:

“Loose monetary policy, achieved through quantitative easing and low interest rates, has redistributional effects, particularly penalising savers, those with ‘draw-down pensions’, and those retiring now.”

We need to reflect on such statements and consider how to adapt our approach. Standard & Poor’s stated in a report this year that QE has exacerbated wealth inequality.

[Mr Steve Baker (Wycombe) (Con)]

I welcome this debate. I wonder whether the hon. Gentleman saw the editorial in The Daily Telegraph of 13 September headed, “A pension scandal at the Bank of England”, which discussed the fact that senior staff had been given massive increases in their pension contributions in order to fight the phenomenon he mentions. I am afraid that what is sauce for the goose in the case of the Bank of England is not sauce for the gander. Does he agree that the Bank of England is in danger of being accused of hypocrisy again and again as this proceeds?

[Ian Blackford]

The hon. Gentleman makes a very good point. I have not read the article, but I have seen the press headlines about it. That is exactly the point I have tried to make in painting a picture of the inequality. Those at the top or in the vanguard of society, if one wants to put it that way, are seen as benefiting from the quantitative easing programme—it benefits the pension schemes of those in the Bank of England—while ordinary workers and savers have been penalised. He is absolutely right, and one therefore recognises why we have the disconnect in society.

[Helen Goodman (Bishop Auckland) (Lab)]

One of the problems caused is obviously inflation in house prices, which I will say a little more about later. In response to the hon. Member for Wycombe (Mr Baker), is it not also the case that the Bank of England is still subsidising the mortgages of its staff and helping them up the very steep property ladder?

[Ian Blackford]

I must say that I have no particular knowledge of that, but if it is the case, I agree with the hon. Lady that it is not helpful. I did not specifically mention house prices when I was talking about the rise in financial markets, but quantitative easing has clearly led to an increase in property prices, and we know the problems that people suffer from, particularly in the south-east of England, as a consequence. That is one of the unintended consequences I mentioned.

I hope that the Minister will reflect on all this and, when he responds, tell us how the Government can bring forward measures that will address specifically the issue of rising wealth inequality, which concerns Members right across the House. While I recognise the desire of the Bank of England proactively to take action to support confidence in the financial markets and the wider economy, the Treasury has been almost completely absent in the deployment of fiscal policy tools to grow the economy and counter the negative impact of Brexit. One cannot divorce monetary and fiscal policy; they have to work in tandem. There is a particular challenge in encouraging companies to invest through their seeing a growth opportunity in the wider economy. We all have responsibility for creating the circumstances in which there is a realisation of such growth opportunities.

I appreciate that the illogical desire of the previous Chancellor to achieve a fiscal surplus in the current Parliament has now, thankfully, been abandoned. We should all share in a desire to cut the deficit and debt, but the question of how to get there requires a much deeper debate. I am pleased that voices across the Chamber now seem to recognise that we have to accept our full fiscal responsibilities, as well as our monetary responsibilities, to strengthen confidence and growth.

In particular, we need to consider infrastructure investment, as a counterpart to our monetary measures, to build capacity, improve efficiency and create an environment that will encourage business investment to allow us to improve productivity, competitiveness and, as a result, living standards. It is about making sure that we move away from a situation in which QE has been beneficial to those owning financial assets to one in which wider society sees a greater benefit from a more balanced approach.

My party, the SNP, has long advocated ending and reversing the Tory Government’s programme of austerity, which has failed our economy and harmed our social fabric, and using fiscal tools to create a fair, resilient and balanced economy. The productivity and inclusive growth Bill proposed in the SNP’s alternative Queen’s Speech would bring about an inclusive, prosperous economy through a modest investment in infrastructure and vital public services. Such a balanced approach would return the public finances to a sustainable path while continuing to invest. The Bill would boost investment, halting the austerity programme that has strangled economic progress. It would oversee increased spending on public services by a modest 0.5% a year in real terms between 2016-17 and 2019-20, which would release over £150 billion during that period for investment in public services, while ensuring that public sector debt and borrowing fell over the current Parliament. In doing so, the Bill would stimulate GDP growth, and support wage growth and tax receipts. By transforming productivity and innovation, it would act as a major signal of confidence in our economy. Such a modest increase in expenditure would stop the cutbacks that disproportionately burden the most disadvantaged groups, cause widespread suffering and inequality, and deny opportunities to so many.

The International Monetary Fund, in its latest “World Economic Outlook”, has revised growth projections down, signalling the headwinds ahead, and urged policy makers to engage in more active policy responses to tackle the underlying challenges. It called for advanced economies to “strengthen growth” by engaging in

“structural reforms, continued monetary policy accommodation, and fiscal support—in the form of growth-friendly fiscal policies where adjustment is needed and fiscal stimulus where space allows.”

Furthermore, in an article entitled “Neoliberalism: Oversold?”, the IMF revisited the effectiveness of austerity and concluded that these policies increased inequality and jeopardised long-term economic growth.

In its latest economic outlook from June 2016, the OECD encouraged policy makers around the world to

“break out of the low-growth trap”

and deliver economic prosperity by deploying fiscal policy “more extensively”, as well as by taking advantage of the low-interest rate environment created by monetary policy. It suggested the use of structural policies to enhance market competition, but also urged Governments to intervene to enhance labour market skills and invest in infrastructure that would deliver long-term productivity and economic growth.

Even the US has pressed other G20 countries for more fiscal policy activism to put growth ahead of austerity. Ahead of the September 2016 summit in China, the US Treasury Secretary, Jack Lew, said a “consensus” had formed around the US position on the need for countries to “use all policy tools”, including monetary, fiscal and structural reforms.

The UK Government’s failure to co-ordinate fiscal and monetary measures to rebalance the economy following the financial crisis has left a toxic legacy of stagnating growth. The SNP understood the use of quantitative easing by the Bank of England as a response to the financial crash and a temporary measure to regain stability. However, the effectiveness of monetary policy has been gravely undermined by the austerity agenda and it leaves a legacy of unintended consequences that will put an unprecedented burden on future generations. The Bank of England should evaluate the effectiveness of its QE programme and the wider consequences of its continuation after the UK’s decision to leave the EU. The UK Government should reflect on that and put in place effective fiscal measures.

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[Mr Baker]

My hon. Friend asks a magnificent question, one that is discussed on the website of the Cobden Centre—a think-tank that I co-founded. [Interruption.] There, I said it. The question is, “Would Hayek have supported QE?” The consensus of Hayek scholars is that, given all the circumstances at the time, he would have supported it, to prevent the money supply collapsing and the horrific humanitarian consequences that that would have involved. But would he have supported it now to try to stimulate the economy, creating patterns of economic activity sustained only by that expansion of the money supply? Flatly, no. I was not in Parliament at the time, and I am happy to tell my hon. Friend that I did not have to make that decision. We are where we are.

My second point is that I believe policy is now ineffective and counter-productive. The Governor told the Treasury Committee that we have “extraordinary, if not emergency” monetary policy; we have had it since 2009. I believe that if, during that seven-year period, productive investments could have been made, brought forward and induced by these low interest rates, they would have been made by now. When it comes to real productive investment, I think we are into the law of diminishing returns. We therefore run the risk of inducing firms to engage in activities that will not have a return—in other words, banks will make non-performing loans. That is, of course, the problem afflicting the Italian banking system, as we sit here.

The question is whether this monetary policy can produce a self-sustaining recovery and do it in a non-inflationary way. One of my advisers wrote to me before this debate to say that if we

“remove the base effects from the collapse in oil prices—as will happen over the coming months—and then just let the underlying ‘core’ inflation trends continue as they are, CPI would be 4%+ by mid-2017.”

That is something I shall ask the Governor about next time we see him.

Further to what the hon. Member for Ross, Skye and Lochaber said, Andrew Lilico, an economist at Europe Economics, has pointed out:

“In the three months to July 2016…the UK’s broad money supply (on the Bank of England’s preferred ‘M4ex’ measure) grew at an annualised rate of 14.7%”.

When I raised this with the Governor at the last Treasury Committee meeting—I used the monthly figures; it is far starker if we look at it quarterly—I asked whether, if the money supply is currently growing by 14.7% annualised over three months, we should expect more or less inflation next year. I think that I know the answer, but when I put it to the Governor, his answer was that aggregates had moved away from the whole problem of inflation targeting. I encourage the hon. Member for Ross, Skye and Lochaber to have a look at exactly what he said. I shall return to some of the Governor’s remarks in a few moments.

[Ian Blackford]

I am very much enjoying listening to the hon. Gentleman’s contribution. Given the case that he outlines, does he consider that there is a bubble in financial assets and, indeed, in property assets, and if he does, what would he do about it today?

[Mr Baker]

I certainly agree with the hon. Gentleman. Indeed, the Bank of England’s Andy Haldane said that the Bank had deliberately inflated the biggest bond market bubble in history. That is not a literal quote because I do not have it before me, but that is broadly what he said. If we look at the period 1997 to 2010, the period before the crisis, and look at the regional distribution of house prices, we find an eerie correlation between it and the increase in the money supply. That distribution of changes correlates with what one might expect of Cantillon effects—in other words, in London and the south-east, house prices rocket away quicker and earlier, while in the north-east and Scotland, house prices increase more slowly as the money spreads out. My point is that there is a good case for saying that Cantillon effects and the increase of the money supply have a profound effect not only on particular assets, but on the regional distribution of prices. It is something that the Bank should consider in its report. It should speak to and address the issue. Speaking as a humble aerospace and software engineer who has only read a few books, it is not within my gift to produce the research.

My next point is that this is a deliberate policy of manipulating asset prices, disrupting the price mechanism in the capital markets. Therefore, there will be a misallocation of capital. The Governor made a speech in New York at a monetary policy conference in which he acknowledged this phenomenon. I have tried to raise it further with him, but he is very good at moving the subject on. His speech was in defence of inflation targeting, and he dealt with four criticisms of it. The first was that price stability does not guarantee financial stability. He went on:

“Second, the stronger critique of the Austrian school is that inflation targeting can actively feed the creation of financial vulnerabilities, especially in the presence of positive supply shocks… From the Austrian perspective, this misguided response”—

the response of the central bank—

“stokes excess money and credit creation, resulting in an intertemporal misallocation of capital and the accumulation of imbalances over time. These imbalances eventually implode, leading to crisis and ‘bad’ deflation.”

It cannot be said that the Governor of the Bank of England is unaware of the somewhat unfortunately titled Austrian school of economics, which I believe in and which tells us that money creation has real structural effects on the economy that affect people’s everyday lives. I was going to challenge the Bank to include in its report an assessment of these things, to demonstrate whether or not it was aware of these effects, but the Governor’s speech has shown us that the Bank is aware. It should not only show in its report that it is aware, but justify what the Governor went on to imply, which is that, by using other instruments, it could deal with these structural consequences. That is one of the big questions of our time: whether or not the structural consequences of easy monetary policy can be dealt with using its other instruments. I am absolutely convinced they cannot be dealt with, and therefore we will have a worse crisis later than the one in 2008.

I sense that Mr Deputy Speaker would like me to wrap up, so I will just make the following point. This has gone from an exercise in saving the financial system to an exercise in kicking the can down the road. How will it develop in future? We have gone from low rates to QE, and I think we will go to negative rates. There has already been talk of banning cash. There have been discussions of helicopter money, too, and at the recent inflation report meeting, out of four people, only the Governor would rule out helicopter money. It is encouraging a misguided belief that if only we printed money and gave it to everybody, there would be justice. This kind of naive inflationism is madness.

[Ian Blackford]

indicated assent.

[Mr Baker]

I am grateful to the hon. Gentleman for agreeing with me.

We have got to get to a point where we escape from easy monetary policies. That will come through one of three mechanisms: a self-sustaining recovery, which I emphasise I very much hope for—I hope that the Bank, and all the central banks, are right on that—or the next phase will be massive inflation, or there will be an abandonment of easy monetary policies before either of those things, at which point there will be an horrific correction.

The great question for society and us as representatives, and indeed for monetary economists, is going to be what went wrong. Will people blame the free market and vote for the policies of certain Opposition Members, which will lead to more statism and I would argue impoverishment and misery? Or will people blame central planning by central banks, which is deliberately dislocating our economy, manufacturing injustice and undermining faith in the market economy and has dropped us into a profound crisis of political economy?

I very much welcome this motion. I shall certainly support it, and I congratulate the hon. Member for Ross, Skye and Lochaber on moving it.

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[Ian Blackford]

Will the hon. Lady just confirm that the Bank of England said that it would come back in September 2018? I hope that it will come back before then, because otherwise it suggests a complacency and unwillingness to analyse the situation and give us the information that I think this House should be demanding.

[Helen Goodman]

Well, that is probably my fault, because I asked it to do so by September 2018. We could ask it for something here and now, but obviously the new package was only announced in August and its impact will be felt some way down the track. My thinking was that there will be no point trying to analyse the new package by Christmas, because we will just not see it.

In addition to having a better understanding of all the effects of its QE programme, the Bank needs to look at what other central banks do, including the European Central Bank because there could be some useful lessons. I think that we might get some better effects if we tweaked it a bit. I have to say that it has a bit of a blind spot when it comes to the issue of distribution. When we quizzed its officials about their purchase of corporate bonds, they said that they were distributionally blind. In other words, they wanted to be completely neutral and not take a position. When we asked them about the distribution of wealth among households, they seemed to confuse being politically neutral with not taking a view on the significance of distribution. I think that is a mistake. I also think that if we are piling lots of money towards richer and richer people, the monetary impact is likely to be much less, because the propensity of the wealthy to consume is much less than that of people on low incomes, so it is not even being done in the most effective way.

I will read what the Bank said:

“the Chairman made some points a little earlier about accountability and the Bank being involved in decisions that were the province of politicians, or some might think would be the province of politicians.”

It went on to say that the tools it has

“are not perfect…However, we have a clear objective, which Parliament has given us…and we have certain tools to implement it. It does have distributional effects, and if we were to be in the business then of deciding what the distributional effects should be, we would be straying even further into areas that are really the province of elected politicians.”

That is a fundamental misapprehension. The hon. Member for Horsham (Jeremy Quin) pointed out that QE was embarked upon in 2009 to speed up growth; the distributional impacts were not in mind. However, now we know that it is producing those wealth effects, it is disingenuous to ignore them. That is the position the Bank is trying to take and we need to push back. I am grateful that the hon. Member for Ross, Skye and Lochaber has given us the opportunity to do that in the House today.

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[Ian Blackford]

I thank the Backbench Business Committee for granting this debate and all the Members who have participated. We have had a well-informed, fascinating debate. I hope that this the start of something whereby we have signalled to the Bank of England, which I am sure will be getting a report of our proceedings, that we wish to see a more fundamental analysis of the outcomes of the QE programme. There has been a very clear message to the Government—as shown by all the actions that we have seen internationally, with the words from the OECD and even from the US authorities—that there has to be a linkage between monetary and fiscal policy. A number of Members have delivered a very strong message that we really have to make sure that we deal with wealth inequality. I look forward to carrying on this debate, and look forward to the Government addressing the issue in the autumn statement.

[Helen Goodman]

On a point of order, Mr Deputy Speaker. Five minutes ago, the Minister said at the Dispatch Box that inequality in this country is lessening. On some measures of income inequality, that is true, but this afternoon we were debating wealth inequality.