Prof David (Danny) Blanchflower and I made a joint submission to the House of Commons treasury Committee on Friday. They had asked for evidence on quantitative easing (QE), quantitative tightening (QT) and the Bank of England (BoE) Asset Purchase Facility (APF).
We submitted this:
The summary we prepared for journalists was as follows:
The House of Commons Treasury Committee has requested written evidence concerning policy on quantitative easing (QE), quantitative tightening (QT) and the future of the Bank of England Asset Purchase Facility[1]. In response Professor Richard Murphy, Professor of Accounting Practice at Sheffield University Management School and Professor David (‘Danny') Blanchflower, Bruce V. Rauner Professor of Economics at Dartmouth College, USA, and Professor of Economics at Adam Smith Business School, University of Glasgow, have made a joint submission to the committee.
We suggest that:
- QE was beneficial for the UK economy from 2009 to 2020 because austerity-driven fiscal policy would otherwise have led to deflation and recession during this period.
- QE did not create the inflation seen from 2021 onwards, which was created by external supply chain problems and disruption resulting from war in Ukraine.
We argue that:
- The Bank of England did not have a strategy for QE in 2009, has not developed one since, and has provided no evidence of having an understanding of the reasons for QT now, and so has no strategy for that either.
- These conclusions are based on Professor Blanchflower's experience as a member of the Bank of England Monetary Policy Committee from 2006 to 2009 and a review of the subsequent actions of, and statements by, that Committee.
- In the absence of coherent strategy, there is no justification for QT.
- The collapse of Silicon Valley Bank and Signature Bank in the United States on March 13 2023 is indicative of the consequences of inappropriately undertaking monetary tightening too rapidly.
As a result we suggest that:
- The Bank of England is at risk of making a serious error by pursuing a policy of QT now.
- Based on analysis of UK government bond issues this century the policy of QT proposed by the Bank of England will place unprecedented demand on financial markets to fund the government over the next five years, with an unprecedented £178 billion of debt likely to be issued on average in each of those years, which may have a serious impact on financial market and so commercial bank liquidity.
- This policy can only be achieved by creating exceptional positive real (inflation-adjusted) interest rates that will have a deep impact on both households and business, threatening growth, business solvency and employment in businesses that might fail, resulting in the risk of recession or even depression.
- There is, then, no justification for a policy of QT now, and because of the already exceptional demand that the government might make on financial markets over coming years a new round of QE to address the crisis that the UK is in might be more appropriate. They suggest a programme of £50bn a year for the next five years.
- There is also, based on the Bank of England's own growth and inflation forecasts, an urgent need for an interest cut in the Bank of England base interest rate. They suggest a 1% cut now, with more to follow.
- They also suggest that there is at this moment no basis for a programme of austerity from the government.
- They suggest that there is no reason for the Bank of England Asset Purchase Facility to be run down and that it should, instead be expanded.
As a result, we suggest that there is no need for the Bank of England to necessarily buy government bonds using quantitative easing. They suggest that it might also consider buying:
- Mortgages, replacing them with new very long-term mortgages at a fixed rate for the whole mortgage term to provide mortgagees with long term financial security.
- Student debt, which could again be replaced with new loans at low fixed rates.
- Bonds issued by a national infrastructure bank to fund the green transition the country requires.
In press release I said:
The Bank of England has never been able to justify its policy on QE or explain its impact. What is, however, clear is that despite this that policy has been benign and saved the country from many of the worst impacts of the austerity pursued by successive governments since 2010 without creating the current inflation we are suffering.
The Bank of England is also unable to justify its QT policy but what is clear is that this policy if combined with more austerity in fiscal policy and high interest rate might have disastrous consequences for the UK economy over the next few years, including household debt and consequent banking crises as well as by creating a major threat to the viability of many businesses. The Bank should cancel this policy now.
Danny said:
The Bank of England is showing signs of dangerous group think when it comes to QT, believing that it must reverse the previous policy of QE when they have not as yet offered any credible reason for doing so.
The evidence is clear from this week's Silicon Valley Bank (SVB) fiasco. Over-hyped interest rates killed that bank and have left government's exposed to supporting depositors whilst after bank capital has been wiped out.
SVB bought large amounts of government bonds which declined in value as the US Federal Reserve raised interest rates. As a small bank of under $250bn in assets SVB were not subject to the liquidity and diversification of asset rules required of the large banks under the US Dodd-Frank legislation introduced after the 2008 financial crisis.
Financial markets have already responded with demands for reduced interest rates and expectations of further rate rises in the US have declined sharply. Markets are now pricing in rate cuts in the US in 2023. Cancelling QT has to happen in that case: the economy cannot support unnecessary stress created by central banks without good reason.
The Bank of England needs to stand back and reappraise its role on the economy. It could use QE over the next few years to be a powerful force for good for the people of the UK, transforming the mortgage, student loan and business investment markets in the process using new funds created via QE. We urge them to grab this opportunity instead of heading us towards almost inevitable recession or even depression, so severe could the impact of QT be.
The report that supports this submission is long at 46 pages, but comprehensive in its review.
That report can be found here.
We believe that the case we have made for an alternative economic strategy is compelling. This is especially true now that we know that commercial bank liquidity is strained and QT would stress it even further. The need for change is urgent.
Comments are welcome, of course.
[1] https://committees.parliament.uk/call-for-evidence/3036/
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Would it be fair to conclude that the Treasury and BoE regard QE much like a prescription drug. Whose effects were undoubtedly initially benign. But to which our economy has now become dangerously addicted?
Whereas your position might be summed up as ‘There is no evidence that its broke (yet). So they ought not to be trying to fix it’?
Very broadly, yes
I understand and support the green deal type of investments, which like infrastructure, will have a great, positive effect on the economy.
Please forgive my ignorance, if I am wrong, but can you explain why we should fix mortgages and student loans? Specifically, how does doing this help the economy?
It helps the individual budget
It stops exploitation
Doesn’t that matter?
On the subject of interest rates, if you have a spare 8 minutes I would recommend this clip of Jon Stewart interviewing Larry Summers.
Summers acknowledges the enormous harm of interest rate rises but claims they are necessary for the greater good. Stewart keeps pointing out that a large part of the inflation is caused by the rich and corporate profits and he keeps asking why we don’t deal with inflation by targeting these rather than using methods that hurt the poor the most, and although he keeps asking this Summers never actually answers this question. It would be nice to see this kind of questioning towards figures in the UK government or BoE.
https://www.youtube.com/watch?v=tU3rGFyN5uQ&ab_channel=TheProblemWithJonStewart
Very good
For the blog tomorrow I think
Please.
Would be great if they take up the suggestions of QE related to mortgages, student loans, green investments.
Pendantic point ? – under the numbered points ‘we suggest’ there are are some ‘they suggest’ …
Apparently committees publish evidence received on the parliament website
Wonder if they will invite you to give oral evidence.
It was a press release I quickly adapted
Call that an editing error
Please send the report and summary to Rachel Reeves and Keir Starmer who are clearly badly in need of some education.
OK
My view is the BoE is working on behalf rentiers anyway who are – true to form – wanting to dig their snouts into the interest rate rise gravy train.
The BoE likes these people because like the Treasury it is still addicted to austerity because austerity always rewards and benefits capital, and capital is favoured because it is money already in existence and just needs to be kept that way. Austerity helps to reward those who are rich – and being rich is virtuous apparently.
So for me at least your paper and its conclusions are simply pointing out that however virtuous that wealth is, the problem still lies in the system that supports that wealth which is fundamentally weak, under policed, under regulated, addicted to risk and insanely optimistic about what it can do.
You are simply pointing out that current policy puts the country’s economic eggs all in one basket – one that it coming apart and very fragile. What fiscal policy needs to do is broaden its support through out the economic sectors/society and spread the burden.
Danny and yourself make perfect sense to me. But I feel that what is dominating this is a sense of loyalty to the notion of entitlement.
Thanks
I don’t suppose anyone in government will take a blind bit of notice, and even if (very unlikely) anyone in the Select Committee and Treasury actually does read through your and Blancheflowers’ excellent analysis and suggestions and try to persuade ministers to take a different direction other than more austerity is very low. So domestic and blind has Conservative propaganda become that any deviation from their chosen path of rewarding the rich and starving the public services and the bulk of ordinary people will be completely ignored. The problem with QE as you point out is that its effect, though ameliorating the financial crisis 2007 – 2009 and the more recent Covid and energy price crisis, has led to a massive transfer of wealth to the very rich minority leading to the UK being the most unequal society in Europe. As massive capital spending is required to counter the climate heating crisis the problem is to get the government to adopt a Green QE that goes directly onto a massive insulation programme, renewable energy, electrical energy storage, and advanced battery technology etc and not into the vast expense of projects of nuclear power at Sizewell C and eleswhere.
They may read the summary at the start of the report.
But we sent in the lot because someone might read it.
You could hope Labour might.
If I understand you right, you are suggesting the BoE do more QE but instead of buying in government debt (gilts) they buy in personal debt in the form of mortgages or student loans. I can see they could be equivalent in monetary effect, but can’t quite see how it could be done. That might just be my poor understanding of economics; perhaps you could elaborate in a future blog. In the case of gilts there is a well-established market in which the BoE is just another buyer, it isn’t obvious to me that there is any comparable mechanism in the other cases.
Your submission is an interesting intervention given I think the coming week includes the next MPC meeting. What chance they will keep interest rates the same – which would at least send a valuable signal – let alone start reducing them?
Our point is these debts can be traded – as mortgage debt has, of course, been. Student debt has been sold and investment bank could be traded. There is no issue in them being used for QE, any more than private company debt was.
It’s been suggested that the Fed’s new Bank Term Funding Program (BTFP) represents (i) up to $4.4T QE, the value of all US treasuries and mortgage-backed securities owned by US banks, and (ii) the Fed implicitly guaranteeing all deposits in US banks. Further, that similar policies will now be adopted by the ECB, BoE, etc., with the excuse that this in order to prevent capital from moving to the US from Europe where deposits are not yet similarly guaranteed. If this action is taken reactively – in response to the near-failure of EU/UK banks, say – then that could curtail discussion of the positive uses to which QE might be put. The discussion would all be about protecting deposits. The extent of QE would depend on how much of the loan facility is taken up by the commercial banks, and it would not even be called ‘QE’. Governments would continue to push the fiction that government spending is like household spending.
Do you think that this is a likely scenario?
Certainly plausible
Good to see this being discussed in the MSM Guardian today:
https://www.theguardian.com/business/2023/mar/19/slash-interest-rates-and-stop-bond-sales-ex-policymaker-david-blanchflower-tells-bank-of-england
Thanks
My understanding of QE over the past decade is that it did inflate the price of assets, property in particular, as banks lent only to their “trusted” customers and only about 8% of QE was invested in the productive economy. Future QE needs to more controlled and directed into the Green economy.
That is correct
But as Danny and I argue, that need not have been the case