Professor David (Danny) Blanchflower and I made a joint presentation to the House of Commons Finance 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 send this:
The summary we prepared for journalists was as follows:
The House of Commons Treasury Committee has requested written evidence on the policy of quantitative easing (QE), quantitative tightening (QT) and the future of the Bank of England Asset Purchase Service.[1]. In response, Professor Richard Murphy, Professor of Accounting Practice at the University of Sheffield School of Management 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 presentation to the committee.
We suggest that:
- QE was beneficial to the UK economy from 2009 to 2020 because otherwise austerity-driven fiscal policy would have led to deflation and recession during this period.
- QE did not create the inflation seen from 2021, which was created by external problems in the supply chain and the disruption resulting from the war in Ukraine.
We argue that:
- The Bank of England didn’t have a strategy for QE in 2009, hasn’t developed one since, and hasn’t provided evidence of understanding the reasons for QT now, so it doesn’t have a strategy for that either.
- These conclusions are based on Professor Blanchflower’s experience as a member of the Bank of England’s Monetary Policy Committee from 2006 to 2009 and on a review of that Committee’s subsequent actions and statements.
- In the absence of a 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 undertaking monetary tightening inappropriately and too quickly.
As a result we suggest that:
- The Bank of England risks making a serious mistake by pursuing a QT policy now.
- Based on analysis of UK government bond issues this century, the Bank of England’s proposed QT policy will impose unprecedented demand on financial markets to fund the government for the next five years, with unprecedented debt of £178 billion likely to be issued on average in each of those years, which can have a serious impact on the financial market and therefore on the liquidity of commercial banks.
- This policy can only be achieved by creating exceptional positive real (inflation-adjusted) interest rates that will have a profound impact on both households and businesses, threatening growth, business solvency, and employment in companies that could fail. , resulting in the risk of recession or even depression.
- Therefore, there is no justification for a QT policy now, and due to the already exceptional demand that the government could make on the financial markets in the coming years, a new round of QE to address the crisis in which the UK might be more appropriate. . They suggest a program 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 a cut in the Bank of England’s core interest rate. They suggest a 1% cut now, with more to follow.
- They also suggest that there is currently no basis for an austerity program by the government.
- They suggest that there is no reason for the Bank of England’s Asset Purchase Facility to run dry and 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 you might also consider buying:
- Mortgages, replacing them with new very-long-term mortgages at a fixed rate for the entire term of the mortgage to provide creditors with long-term financial security.
- Student debt, which again could be replaced with new low fixed rate loans.
- Bonds issued by a national infrastructure bank to finance the green transition that the country requires.
In a press release I said:
The Bank of England has never been able to justify its QE policy or explain its impact. What is clear, however, is that despite this, this policy has been benign and has saved the country from many of the worst impacts of the austerity applied by successive governments since 2010 without generating the current inflation that we are suffering.
The Bank of England cannot justify its QT policy either, but what is clear is that this policy, if combined with more austerity in fiscal policy and a high interest rate, could have disastrous consequences for the UK economy in the next few years, including household debt and consequent banking crises, as well as creating a major threat to the viability of many companies. The Bank should cancel this policy now.
Danny said:
The Bank of England is showing signs of dangerous groupthink when it comes to QT, believing it must reverse previous QE policy when they have not yet offered any credible reason to do so.
The evidence is clear from this week’s Silicon Valley Bank (SVB) fiasco. Exaggerated interest rates killed that bank and have left the government exposed to supporting depositors while the bank’s capital has disappeared.
SVB bought large amounts of government bonds whose value fell when the US Federal Reserve raised interest rates. As a small bank with less than $250 billion in assets, SVB was not subject to the liquidity and asset diversification rules required of large banks under the US Dodd-Frank legislation introduced after the 2008 financial crisis. .
Financial markets have already responded with calls for lower interest rates and expectations of further US rate hikes have declined sharply. Markets are now pricing in US rate cuts in 2023. The QT cancellation has to happen in that case – the economy cannot take the unnecessary stress created by central banks for no good reason.
The Bank of England needs to take a step back and reassess its role in the economy. It could use QE in years to come to be a powerful force for good for the people of the UK, transforming the markets for mortgages, student loans and business investment in the process using new funds created through QE. We urge you to seize this opportunity rather than steer us into an almost inevitable recession or even depression, so severe could be the impact of QT.
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 commercial bank liquidity is tight and QT would stress it further. The need for change is urgent.
Comments are welcome, of course.
[1] https://committees.parliament.uk/call-for-evidence/3036/
