Does anyone looking at the British economy seriously think that what we need is more inequality rather than investment in housing and infrastructure? Of course not. And yet this is what the British programme of quantitative easing (QE) has delivered.
The Bank of England’s estimate is that the top 5% of households have gained at least £185,000 each from QE. The European programme is different, so I went to the ECB to see what we could learn from them.
Massimo Rostagno is the Director for Monetary Policy at the ECB and is in the middle of managing a QE programme of €60bn per month (c.£40bn). He believes this will have boosted Eurozone GDP by 1.25% over two years. I wanted to understand how he runs the ECB QE programme and see whether this would throw any light on the somewhat polarised debate over “People’s QE” we’ve had in London.
When John McDonnell, Labour’s new Shadow Chancellor, floated this idea last year it was greeted with total derision by many, including of course George Osborne, who said during the Autumn Statement that “[it] is called deficit financing, and it has only been tried in Weimar Germany and Zimbabwe. It would lead to the economic ruin of this country.”
However, the truth is that George Osborne has overseen £175bn of QE himself.
In 2009, Alistair Darling authorised the Bank of England to undertake a significant QE programme and by the General Election in May 2010 the Bank (via the Asset Purchase Facility) had bought £200bn government gilts and a very small amount of commercial debt. Over the following two years, George Osborne continued the programme.
The purpose of this was to boost the supply of money and credit in order to raise the rate of growth. For the last three and a half years, the independent Monetary Policy Committee of the Bank of England have taken the view that the stock of gilts should be held at £375bn. They take the view that no more QE is needed because the British economy is growing and that if an inflationary risk emerges it should be curbed by raising interest rates, not “unwinding” the QE which would reverse the earlier boost. This is not surprising – the US Fed raised interest rates in December last year and while the world economy now looks distinctly rocky (so an early UK rise would be unhelpful), the fact is that the impact of interest rates is more predictable and so, if and when conditions change, they are a safer policy instrument.
However what this means is that QE is here to stay. All the time of course, gilts are being redeemed by the Treasury, so to maintain the stock at £375bn, the Bank purchases more gilts. This asset purchase programme is running at around £25bn per annum.
My question is whether the UK approach is giving us the best impact on the real economy? Put another way – has the UK QE programme worked and could we improve on it?
The Bank of England’s own assessment published in 2012 found that GDP had probably increased by over 1.5%, which was creditable and beneficial for the economy as a whole. However, as the Bank says:
The benefits of loose monetary policy have not been shared equally across all individuals… Some individuals are likely to have been adversely affected by the direct effects of QE. Many… have received lower interest income on their deposits. But… by pushing up a range of asset prices, [QE] … [has] boosted the value of households’ financial wealth held outside pension funds [and] the top 5% of households [hold] 40% of these assets.
This is a staggering finding. It means the bottom 50% of households have seen no rise in their wealth – as they hold no such financial assets, while the top 5% of households have gained £185,000 each because shares and (the most valuable) property have increased in value.
Whereas had QE benefitted everyone equally, we’d all have been £10,000 better off.
This has been shrugged off by the Chancellor and Governor: indeed when I asked the Governor about this in the Treasury Select Committee, he told us that the Bank of England believed that their approach was the most effective way to stimulate the economy given the current remit from Parliament and that to do anything else would be “political”.
Why making the rich richer is not political is, I must confess, something which eludes me, but if we need to change the Bank of England’s remit to get a policy stance closer to that of the ECB we should do so.
There is a very real difference in the way the ECB pursue their QE.
This is what the ECB says:
“Inequality is a cause for concern, since social cohesion is one of the EU’s objectives and inequality is relevant to central bankers as monetary policy may have an impact on inequality”.
In addition to buying government bonds, the ECB have been investing in covered bonds and asset backed securities which provide finance for SMEs, local authorities and housing, and for supranationals like the European Investment Bank. The EIB invests in infrastructure and national agencies, most notably KfW in Germany and Cades in France, which invest in renewable energy, energy efficiency for homes and SMEs.
The UK needs more investment in housing, infrastructure and bank finance for SMEs. NEF estimates 23% of SME loan applications were rejected in 2011/12 and that since the introduction of the Funding for Lending Scheme, 3 of the big 5 banks had failed to increase lending. Instead of continuing to supply a financial boost to the top 5%, wouldn’t it be better to use the £25bn QE capacity flowing through each year to gradually shift the portfolio beyond gilts, and to invest in the Business Investment Bank, Green Investment Bank and Housing Associations? This would not have the monetary risks associated with new QE, but it would get more funds flowing to those activities where they are needed.
Compared to the stock of £375bn of assets, £25bn is not significant, but in terms of flows to housing and SMEs it would extremely useful additional finance – for example, it would be enough to finance an annual housebuilding programme of 250,000. Instead of a sterile debate about austerity versus anti-austerity, let’s try and use the capital we do have constructively to deliver for those who are struggling to find a family home.