The FT has an article in it this morning from a pension adviser called Ken Fisher. In it he says:
Reversing QE is the best way to stimulate lenders. Not at the glacial pace the Fed used until stopping in August. I mean a quick, total disgorgement. The Bank of England should start now – don't wait until after Brexit. Unwinding QE now would set the stage for a post-Brexit pop, with banks loosening lending just as businesses get the clarity needed to deploy pent-up plans.
Ms Lagarde should follow suit when she takes the ECB's reins next month. Cancel the ECB's planned bout of QE and start selling the €2.65tn of long-term debt it bought from 2015-18. US and Japanese central banks should join in, too. Mark Carney would become known as the Pied Piper of monetary sanity, leader of a return to normal central bank balance sheets and higher long rates. Long rates wouldn't soar – there isn't enough inflation for that. But they'd rise enough to re-steepen yield curves globally.
I reproduce in full to give a flavour if the passion with which Mt Fisher makes his case.
Mr Fisher's case is economically absurd. To be blunt, what he is calling for is a recipe for outright disaster. It is a perfect example of very particular self-interest, coupled with a rather limited appreciation of macroeconomics, or care for consequences, coming up with a suggestion so wrong that the FT manage to print it.
Let me deal with the self-interest issue first. Mr Fisher is described as the founder and executive chairman of Fisher Investments and chairman and director of Fisher Investments Europe. I have seen their adverts. They are targetted at the reasonably wealthy soon to be retired person whose portfolio Fishers wish to manage. So Mr Fisher has an alignment of interest with a particular group who want high-interest rates to keep them in retirement and to increase the value of their annuities.
This is the group who have already done best out of the recessionary environment of the last decade.
And it is also the group who right now are the focus of much of the ire of younger generations. This is the group who have burned the planet.
And now they wish that the economy be trashed to keep them in retirement at cost to everyone else.
Let me explain why Mr Fisher's hopes are so misplaced.
First, Mr Fisher's facts are wrong. Bank margins on lending - which is what motivates them - have not fallen as a percentage or in value terms over the QE period. The fact is that QE has not hurt banks. So raising rates will provide them with no greater incentive to lend: they are already doing just fine, and increasing rates will not improve their margins. It will instead simply reduce the demand for borrowing and increase the rates paid to savers. This could harm them. Bankers like QE.
Second, there is no evidence that there is pent up demand for borrowing. The exact opposite is true.
Third, the increase in rates that Mr Fisher wants will crash the price of bonds: rates and the price of bonds are negatively related. The resulting losses will seriously impact many of the pension savers whose interests he thinks he is acting in.
Fourth, that increase in rates would also substantially reduce the price the government would get for the bonds it sold back into the market. Why would it want to sell in that case when it has no need to do so?
Fifth, there will not be a flood of new economic activity a a result of increasing interest rates, unless Mr Fisher is referring to the supply of insolvency services. Businesses are vastly over debt-laden at present. Most corporate failures of late are for precisely this reason. Increasing interest rates will force many out of business. There will be no boom then. But there will be bust.
And, sixth, the same is true in the household sector, where many households are in debt to their limits and beyond. It is very likely that increasing rates would tip many households into insolvency. Housing repossessions would increase. Bank balance sheets would rapidly look very weak as house prices fell as a result. And there would be no new buyers coming into the market: the young would be put off by the increased cost of borrowing even if they had the chance to borrow, which few have. A demand for increased deposits to provide banks with extra security would kill any increase in demand in any case.
It is highly likely then that, seventh, a banking crisis would follow.
And eighth, that would lead to recession.
Which in turn, ninth, might lead to new austerity.
And tenth, that is bad for pensioners.
Need I go on? Mr Fisher has all that he claims, completely, wrong.
The reality is that the QE that has been done is settled for good: that is now cancelled debt, and simultaneously new money. The deal is done and dusted.
And the same might be said of interest rates. These are now near zero and they will be staying there for a very long time to come because no alternative is possible. The sheer weight of the debt mountain within the economy makes nothing else possible. Interest rates have been killed by debt. And it will stay that way as the debt is not going away. R Fisher had better get his head around it.
And, simultaneously, he needs to appreciate the fact that this means that only government action through fiscal policy is now going to shape the economy: the market is not a player in that arena any more. They killed their golden goose by over-lending.
So Mr Fisher has every part of his economics and political economy wrong.
And last, quite amusingly in the context of the article, this decision is not Mark Carney's to make. Every single QE purchase was Treasury approved. There is no doubt that sales would have to be Treasury approved as well. Fisher has even picked the wrong target for his request.
I won't be seeking Mr Fisher's advice any time soon.
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A ten second Google search reveals Mr Fisher to be – yes you guessed it – an American billionaire ( $3.8 billion to be precise ) . The whole article is no more than a piece of special pleading with a feeble attempt to portray his argument as having some kind of economic logic for the good of all. Do these people – the oligarchs – think that no-one will notice ? I guess they do. Shame on the FT for publishing this rubbish, but they can’t stop themselves acting as cheerleaders for the oligarchs .
🙂
The markets are going to crash and Mr Fisher knows it as well as (probably better than) most people. It’s his business and hobby after all.
He knows damn fine that what he is apparently asking for is not going to be delivered.
What he (and his ilk) needs is lots of mom and pop investors piling their money into the stock markets so he can withdraw what’s left of his personal fortune to cash and gold without the markets noticing and keep rising. The stock markets are far from their crash peak still. Unstable as they are the big bubble climax has hardly started.
Then he’ll be in a position to buy the knock-down government bonds which are quite likely to come to market because people like him will encourage governments that it is sensible to offload them. There will be plenty of bargain basement property assets to scoop up aswell.
Why the FT publishes pish like this is a mystery. Since when was their role not to report, but to contribute to a febrile atmosphere in the markets ?
“Bank margins on lending — which is what motivates them — have not fallen as a percentage or in value terms over the QE period.’
I don’t even know a first day intern in any bank who would make that statement (unless they’ve spent the last decade in a hermetically sealed bubble) — it’s a level of ignorance so deep and profound, one wonders how you, Mr Murphy actually manage to switch on your computer —
Read Martin Sandbu in the FT in the last week: he shows all the data that shows what I say to be true
I hate to tell you but what I said is very well evidenced
I’ve also read a great many of the accounts of these banks as part of my research on country-by-country reporting – and I can tell you the evidence there supports what I say
Maybe you shouldn’t ask the intern a question they’re not qualified to answer
I struggled to understand your point that low interest rates do not impact Net Interest Margins so did some digging and found this in the FT which explicitly states that they do:
https://www.ft.com/content/655a0986-a7f5-11e9-b6ee-3cdf3174eb89
I’m assuming the margins being discussed are the same.
Have I missed something?
Yes
See this, which is a vastly better source
https://www.ft.com/content/3dbca034-df7f-11e9-9743-db5a370481bc
Andy the one I referred to
Keith
Richard’s work rate is phenomenal. It’s real work BTW – productive and useful – unlike most of those in the casino banking sector, so I do understand your unfamiliarity with it.
As I understand it the logic underpinning QE is that, in order to replace the “bought back” gilts, banks and financial entities will seek out other forms of investment, increasing demand for competing financial instruments and increasing lending in general. In other words it should already be doing what this guy is suggesting.
Surely if the BoE reverses the QE process it undermines the justifying explanation carried on its website.
Since no media commentator makes the consolidation net down connection between total government debt and the QE value on the BoE balance sheet, why not cancel the gilts and free up space for £435 billion of public investment assets?
You are right
I wouldn’t read too much in to this. Ken Fisher and his ilk make their money by managing the investments of the large number of people with relatively modest retirement pots. These pots tend to be heavily weighted with safe government bonds. QE has driven the returns on these bonds through the floor. For example, people are paying to hold German bunds. Fisher is simply making his pitch by arguing for the unwinding of QE which will drive down bond prices and up the return on the large number of small portfolios he manages.
Many of the holders of these pots are readers and subscribers of the FT, so it makes some commercial sense. In addition, and perhaps more importantly, the FT is corporately in favour of the dominance of monetary policy over fiscal policy in terms of economic stabilisation – even though monetary policy has run out of effective tools and a credible rationale. Unwinding QE and raising interest rates (and damn the consequences) is seen as the only means of restoring the tool-fit and credibility of monetary policy. Furthermore, increasing the cost of government borrowing will restrain public investment and this is an equally important item on the FT’s corproate agenda.
Fisher’s piece contributes to this campaign. The campaign, of course, is doomed to failure, but it will take a long, long time for the professional flunkies and functionaries who service the current malign mutation of capitalism finally concede and change course.
Agree your conclusions
QE has compressed banks and squeezed the banking sector. Banking in Europe is moribund.
This is not true
See the Martin Sandbu FT article I have linked
Teflon Don says:
“QE has compressed banks and squeezed the banking sector. Banking in Europe is moribund.”
Moribund ??? Banking in Europe is completely fucked.
But it wasn’t QE that fucked it.
If the banking sector is ‘squeezed’ give me some squeezing. I could live with that.
FFS !!
Real interest rates have been falling since the 1990s while countries like Germany and China have built massive trading surpluses that in turn drives interest rates down as more capital looks for a return around the world in often speculative bubble enhancing activities. QE is keeping this dodgy financial system ticking over often investing in wrong stuff e.g. property. QE needs to go the trick is channelling capital into the right investments.
Eric Smith says:
“QE needs to go[. T]he trick is channelling capital into the right investments.
Hmmm….
Yes. OK in theory. But if the order is wrong there will be bugger-all left standing to invest in.
It may be necessary to use properly targeted QE to turn the investment tide towards something productive. (?)
That is in part a proposition of the Green New Deal: turn the ship around and it is perfectly able to power itself.
You get it