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Money printing could prevent a global recession. But MPs want to ban it - THE TELEGRAPH
BY Fran Ivens
In times of looming recession, such as the credit crunch of 2008 or Covid-19, world leaders have stood together and committed to injecting a financial lifeline in to the global economy through quantitative easing (QE).
In buying their own governments’ bonds, these central banks were flooding the economy with cash to keep the cogs of the financial system from freezing.
This week, Goldman Sachs raised its odds of a US recession to 45pc. As markets continue to fall amid President Trump’s ongoing trade war, eyes are turning to central banks to intervene in order to stave off looming disaster.
Between 2009 and November 2020, the Bank of England engaged in five rounds of QE, buying just under £900bn worth of bonds in total. The tactic has been similarly deployed by other central banks, including the US’s Federal Reserve, at times of severe financial stress.
But is it a good idea today? Rupert Lowe thinks not. The now-independent MP for Great Yarmouth has a private members bill currently working its way through Parliament banning QE and government “indemnification” of losses.
What is quantitative easing?
The process of QE involves a central bank buying bonds – and sometimes other financial assets – in order to encourage economic activity.
Large purchases of government bonds push up their price but lower their interest rate, with the hope this then feeds through to rates on products such as mortgages. It also aims to improve market liquidity, boost confidence and lead to some asset prices rising.
Mr Lowe has drafted up a bill, which is currently at its second reading in the House of Commons, where he argues that the practice is akin to when Henry VIII debased the currency by heavily reducing the amount of silver and gold in coins. When bringing the bill to Parliament, he said QE is used by “third-world dictators” and led to excessive state spending and intervention.
It is a controversial view and not one that carries much weight in modern economics, despite the use of QE by the Bank of England having plenty of critics.
Andrew Goodwin, chief UK economist at Oxford Economics, said: “Quantitative easing came into being because central banks ran out of road with interest rate cuts. It was an unusual policy for an unusual time.”
He argues that when QE was introduced ,there were no tools for the Bank of England to reduce interest rates further beyond what is possible through the Bank Rate. At that point in March 2009, the benchmark rate had been cut to 0.5pc by the Monetary Policy Committee (MPC).
“Quantitative easing was brought in when you couldn’t go further with interest rates – but now there has been a study showing you could go negative and there is more road to use up before you go to quantitative easing.”
Most recently, the Bank conducted three rounds of QE in response to the economic challenges of the Covid-19 pandemic. The main aim, according to Monetary Committee Policy meeting minutes, was to prevent the “unavoidable economic slowdown” being amplified by tightening conditions.
Does it waste taxpayer’s money?
However, during this crisis, the move had louder critics.
Sir Paul Tucker, of Harvard Kennedy School and former deputy governor of the Bank of England, told the House of Lords Economics Affairs Committee that he had questioned why the Bank wished to “stimulate aggregate demand just as aggregate supply is closing down”.
The Committee also detailed concerns among institutional investors on the purchase of government bonds when so many were being issued, giving the impression that it was aimed at keeping the government’s borrowing costs down at a time of significantly increased spending.
Even if its decision was within the Bank of England’s remit to manage inflation, the perception of misuse either then or in the future risks undermining market confidence.
Furthermore, William Allen of the National Institute of Economic and Social Research argued that the money lost by the Bank as result of buying bonds at too high prices, currently totalling around £120bn, is significant and could have been avoided if other approaches had been taken. As the losses are “indemnified”, it means that the UK taxpayer, via the Treasury, picks up the bill.
The full cost will not be known until the Bank winds down its policy of quantitative tightening, in which it sells the bonds it acquired to reduce the assets on its balance sheet. However, some estimates suggest it could reach as high as £150bn.
Mr Allen said: “My opinion of quantitative easing is that it was badly designed and recklessly executed. It got worse as it went on as they were paying higher prices for the bonds.”
Macroeconomic effect ‘positive and progressive’
Instead, he argued the Banks should have done more in 2009 to support private borrowing, but he does not dispute that the method was successful in avoiding a harsher recession.
Mr Allen also admits it would have been brave for the Bank of England to adopt a different approach when central banks across the world were responding to the extraordinary conditions in the same way.
A great difficulty in assessing the success or otherwise of QE is the inability to definitively measure its impact.
As the House of Lords Committee noted: “There is a recognition that measuring the effectiveness of quantitative easing is difficult to do with precision.”
It is also tricky to judge based on the counter factual – what would have happened if there had been no intervention.
There are also accusations that it exacerbates inequality, as one of its stated aims – to increase asset prices – disproportionately benefits the wealthy.
The think tank, Resolution Foundation, found that instances of QE up to its use over the pandemic resulted in 40pc of the aggregate gains in asset prices going to the wealthiest 10pc of households in the UK. However, it also found that overall the macroeconomic effect was positive and progressive.
The Bank of England’s own research found the benefits were disparate, with households close to retirement age gaining the most from QE, but the resulting income support disproportionately benefitted younger people and households.
There are signs that when – not if – the next financial crisis arises, the Bank will be more hesitant before looking at QE.
Mr Allen said: “I am absolutely sure they will be more restrained in the future. [Governor of the Bank of England] Andrew Bailey says they don’t want to take more interest rate risk in the future.”
Effect of QE is ‘unclear’
However, that does not mean Mr Lowe’s bill is being welcomed by economists. Many argue that while the merits of individual uses can be debated, it is a necessary tool for the Bank of England to keep in its reserves.
Joachim Klement, head of strategy at Panmure Liberum, said: “There is clearly a consensus that quantitative easing, whether it is the Bank of England or the Federal Reserve, has helped keep long term government bond yields and hence debt servicing costs for the government down.
“The criticism that is sometimes issued for conservative investors is mostly that ‘money printing’ leads to inflation. My view is there is no empirical evidence unless you think that inflation was driven by money printing 10 years ago.”
Likewise, the House of Lords found the effect of QE on inflation, and the extent to which it has increased since the onset of the Covid pandemic, is “unclear”.
Mr Goodwin agrees: “All the main central banks used it in the pandemic and after the global financial crisis. Each central bank did it slightly differently but the debate is about how you operate it not whether it exists.”
Mr Klement took a stronger line. When asked whether the abolition of QE was a topic of discussion in economic circles his response was simple: “Your call is the first time I’ve heard about this.”
Yet questions remain over the policy’s use by central banks.
An increasingly precarious global economic outlook driven in part by Trump’s trade war, with market volatility (Wall Street’s so called “fear gauge”) spiking, may see those at the helm review what tools they have at their disposal and it is unlikely QE will be thrown out all together.
But, with the higher inflation and cost of Covid-19 spending still looming large over UK finances, many will be eager to see more thought given to QE and its impact in the future.
