Quantitative Easing

Roger Mullin Excerpts

Thursday 15th September 2016 Commons Chamber

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

It is with some inevitable trepidation that I stand to speak in the debate, given the eloquence and experience of those who have spoken before me, not least the experience of a modest crofter from Skye, my hon. Friend the Member for Ross, Skye and Lochaber (Ian Blackford). I was taken not only by his great eloquence but by every contribution this afternoon in what, inevitably, is one of the most important debates that I have taken part in. It is also one of the most thoughtful. While others can wax eloquent given their experience in the financial sector over many years and their distinguished careers, I come to this issue trying perhaps to give voice to others who do not have that background.

The ordinary person in the street would recognise that we live in troubled times. There is increased uncertainty and the stability and certainties of the past seem to have flown past. For example, who could have foreseen at the outset of QE that today many economies would be experiencing weak growth, low business investment, collapsing prospects for pensions, near negative interest rates penalising savers and a huge increase, as the hon. Member for Bishop Auckland (Helen Goodman) said, in wealth inequality.

I would like to add something else to the equation. We need to recognise the political instability that has arisen. People are feeling that they are disfranchised, have no voice and are losing hope. That is one of the profound social and political consequences that deserves to be considered.

It was not supposed to be like this. It may be wise to cast a critical eye over what seemed to most people, myself included, an entirely logical response to the crisis some years ago. It is good that people are able to reflect. Although it comes hard for many politicians, it is good when we, too, are modest enough to recognise that we do not always get it right and that we need to learn from experience. For example, many people in recent years feel that the UK Government’s economic plan has been blind to some of the consequences of QE. That is seen in the poverty, in many cases, of the fiscal response to aid those who are not benefiting from the increasing wealth. The Treasury needs to think about doing more to achieve a better balance between the fiscal response and the monetary response. The time is surely right for it to mount a rigorous and open appraisal of the balance between monetary policy and fiscal measures, and of whether each of the rounds of QE has had the desired effect. The Bank could also look at that question.

Let us recall some of the antecedents of QE. I might not have worked in a bank at any time—the only time I go into the bank is when I receive a phone call from it—but in a past life, I used to read quite a lot about this subject. Everyone attending this debate will recall that it was back in 1969, in a paper by Milton Friedman entitled “The Optimum Quantity of Money”, that the idea of what we know today as QE was created. Friedman contended that if policy interest rates reached the lower bound of zero, it would be appropriate for a central bank to purchase assets—Government bonds in the first instance—to create a wealth effect that it was no longer possible to achieve through the conventional interest rate policy of the central bank. Friedman’s notion of quantitative easing was that asset prices would be boosted, leading to an increase in confidence and spending through the wealth effect. In turn, economic activity would be given a boost.

In more recent times, however, even that great monetarist Allan Meltzer—who has written widely on the development and application of monetary policy and on the history of central banking in the US—has questioned the efficacy of QE, arguing that it has not led to what Friedman expected. In particular, the key aim of creating an increase in confidence and therefore investment has not transpired as hoped. Today, too, central bankers seem content to see inflated asset prices. But who speaks for the millions of savers around the world? Who speaks for the ordinary men and women who have paid the price of banking failure? Where were the UK Government when our economy failed to diversify or balance in the aftermath of the global financial crisis? Where were the necessary fiscal measures when it transpired that the relatively poor were paying the price for the mistakes of the wealthy? The SNP and others understood the use of quantitative easing by the Bank of England as a response to the 2008 crisis to be a temporary measure to help to regain stability. How long, I now ask, is this temporary measure going to last?

I agree with my hon. Friend the crofter that the effects of monetary policy have to a great extent been undermined by the austerity agenda, which is now leaving a legacy of unintended consequences that is placing an unprecedented burden on future generations. Broadly speaking, the policies being followed by central banks around the world benefit a relatively narrow group of people—equity-rich individuals and investment banks, for example—but few others. It is the unintended consequences—I admit that they are unintended—of QE that must now be the focus of policymakers.

[Mr Baker]

I agree with much of what the hon. Gentleman is saying. The Bank of England is not represented here, and I do not agree with it, but if it were here, I suspect that it would say that everybody benefited, given the reality that there would have been a worse recession if it had not acted. Does he agree that that argument is now wearing thin?

[Roger Mullin]

The hon. Gentleman must have read the next part of my speech. However, that allows me to haste along and agree precisely with what he has said.

A friend of mine, Dr Jim Walker, wrote to me recently and pointed out that

“interest rates throughout history have not only been the cost of capital (or the reward to thrift) but have also been a signalling mechanism about the future”.

We now know that zero interest rates and QE tell business owners and entrepreneurs that there is little or no growth coming. They therefore encourage businesses to hold cash and be extremely cautious about investment. The signalling mechanisms have had a different effect from those predicted by Friedman. It is again time to review the situation. It would be difficult to argue that QE has therefore led to the increase in confidence and investment that was the argument for it.

We can also see other consequences. Despite eight years of near zero interest rates, UK real gross fixed capital formation is 2.8% lower than its 2007 peak. Therefore, investment in the real economy has not been boosted in the way that was originally thought. A similar phenomenon has being going in other aspects of the economy on the demand side, such as in how households have been afflicted. Zero interest rates and asset purchases were supposed to convince ordinary people to borrow and spend more immediately, but some key groups have reacted to zero interest rates by saving more. Why? In order to provide for old age, they can no longer rely on the positive compounding effect of above zero interest rates; nor can they rely on getting the type of annuity for which they may have planned. Instead of encouraging that group to spend, policies have encouraged them to save more due to fear for the future. Such savers are understandably angry. After years of saving some of their income, many people have zero income from their savings.

I am not somebody who is disadvantaged—I have a well-paid job in this House—but I wonder how people who, like me, have a cash ISA are feeling. Before the crash, it was fairly common to get 6% interest, but I received a letter a few weeks ago to point out that from 1 December the interest rate is going to be reduced yet again to 0.1%. The time has come to undertake a critical review of the policies of recent years.

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

I say to the Front-Bench spokesmen that there are three of them and we are going to finish at 5 pm.