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MPs to investigate Quantitative Easing
At times it seems that there is nobody to hold the government, the Bank of England and the banks to account. The past five years have been incredibly frustrating for savers, many of whom tell us that writing to their MP gets them nowhere. MPs are supposed to represent the interest of their constituents, but few have been particularly sympathetic, most parroting the “if it weren’t for low interest rates and QE, things would be much worse” line taken by their party leaders.
At least we have the Treasury Select Committee, which can hold inquiries into what is going on and demand to see “persons, papers and records.” Select Committees have more power than they used to and have been compared to Washington’s Congressional Committees, but while they have the ability to turn over a stone to see what is crawling around underneath, they have no real power to squash what they find underfoot. However, under Andrew Tyrie’s leadership the TSC has often laid into the FSA, ordering it to publish a full report into the collapse of RBS, for instance, and in 2011 it heavily criticised the archaic system of governance at the Bank of England. They have given Sir Mervyn King a rough ride from time to time although, as the FT said, when he testifies before the TSC King “manages to conceal any fragment of self-doubt.”
An examination of QE
The TSC’s latest inquiry is into the policy of Quantitative Easing, initiated in 2009 by the Bank of England. Unable to cut Bank Rate below the record low of 0.5%, it began to buy up gilts, the idea being that the money would find its way into other assets and somehow therefore boost the wider economy. The Bank has so far committed £375 billion to QE, leaving it holding about a third of all government stocks.
“Without that extra spending in the economy,” the Bank says, “the MPC thought that inflation would be more likely in the medium term to undershoot the target.” The question of why the MPC is so relaxed about inflation going above the 2% CPI target yet so petrified about it ever going below it is a question we will return to soon.
The TSC has called for written evidence in response to the Bank of England’s paper, “The Distributional Effects of Asset Purchases”. In other words, where did the money go? Who has benefitted and who lost out? The TSC wants to assess the impact on the economy as a whole and the cost to taxpayers. We have repeatedly been told by the Bank that without QE the country would have been plunged into an appalling recession. But this is one of those “counterfactuals” Mervyn King is so keen on. How can we know? Let us hope that the TSC can shed more light on this and how QE might, eventually, be unwound.
Save Our Savers’ response
Save Our Savers was asked to make a written submission to the TSC. We pointed out that QE’s boost to asset prices was of greatest benefit to the wealthiest in society. According to the ONS’s 2008/10 Wealth and Assets Survey, 72% of the country’s net financial assets and private pension wealth are owned by the wealthiest 20% of households. The remaining 80% of households own just 28% and will have received either a significantly lower benefit or none at all. Roll your cursor over the bars on this chart from the Spectator and you can see how uneven the QE “benefit” has been.
The Bank appears to have given little consideration to the effects of their monetary policy on those who are less asset-rich and more reliant on savings income. Interest on cash saving accounts form a far greater proportion of disposable income amongst the less well-off, especially those who have retired. We reminded the TSC that from September 2008 to November 2012, instant access savings rates fell 65% while effective ISA rates dropped a massive 87%.
The loss of income was compounded by inflation, which has been exacerbated by QE. The Bank’s calculations put the boost to CPI between 1.4% and 2.8%. Indeed, a recent External MPC Unit discussion paper by Martin Weale, among others, thinks the Bank may have underestimated QE’s inflationary impact. We also drew attention to the way the Bank’s monetary policy has affected annuities. Much as it might argue that pension funds and the like have benefitted from asset price rises, the reality is that annuity rates have dropped sharply.
The income effect
The last few years of monetary policy have heavily penalised savers at the expense of borrowers. The Bank wants to boost demand in the economy. But it appears not to have thought much, if at all, about the effect of forcing down the yields of interest-bearing instruments and deposit accounts. This of course has deprived savers of money that they might otherwise have spent.
We drew the TSC’s attention to an important American study that we have mentioned here before. This found that low interest rates is costing the U.S. Economy an annual $381 billion in spending, 3.5 million jobs and 2.53% of GDP. William F Ford, ex-president of the Federal Reserve Ban of Atlanta, said: “There is an income channel that no one is talking about, and its negative impact can be powerful.”
We feel strongly that if the Treasury Select Committee is examining the effects of UK monetary policy, it should ascertain how serious this “income effect” has been on the UK economy too.
The Bank of England with its pompous, “We know what we’re doing, don’t question us” attitude has had it its own way for too long. We are coming up to the fifth anniversary of Bank Rate being cut to 0.5% and the start of QE yet the economy is still in the critical ward. Why should we trust the Bank’s word that their policies are the only solution when the crisis took them so completely by surprise in the first place?
Let us hope that the Treasury Select Committee is as diligent as we would like and reveals the benefits, if any, of QE to the UK economy.