Please Mr. Carney, look at the facts – we don’t need more QE
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
Bank of England does not have democratic mandate
for this major redistribution of national income and wealth
Voters would reject tax cuts for people in the south,
big borrowers and the wealthiest, while raising taxes on less well off
Economy is growing, no longer in need of monetary experiments
The implications of keeping interest rates so low for so long and artificially depressing long-term rates have so far been ignored, denied or underestimated.
The social and distributional consequences of Bank of England policies have not yet been adequately recognised or analysed. Bank officials do not face the electorate and have therefore escaped democratic accountability for their actions.
National income and wealth has been redistributed without proper Parliamentary debate. Monetary policy is acting as fiscal policy normally would. Firstly, it is helping to finance government debt. Secondly, it has given the equivalent of a big tax cut to certain sections of society, while imposing the equivalent of a tax increase on others.
Some have benefited from quasi ‘tax cuts’ associated with monetary policies: Mortgage borrowers, homeowners with the largest mortgages and most expensive houses mainly in the South of the country, and wealthiest groups (top 5% of the wealth distribution) have had a big windfall – as would be provided by a tax cut.
Banks and Treasury benefit from low rates: Of course the Treasury and large banks benefit from lower interest rates, which help them manage their debts much more easily. These groups have the power to impose their interests on the rest of society. But this needs to be open to scrutiny, rather than happening by stealth.
Other groups have had a ‘tax increase’ imposed on them by monetary policies: All savers, especially those living in the North of the country, youngsters struggling to afford rising rents in the South East (which are the result of artificially high house prices), older generations, pensioners buying annuities, pensioners in income drawdown, companies sponsoring final salary schemes – all have suffered falling incomes, as would be imposed by a tax increase.
Only minority of households have a mortgage – one third rent, one third own outright: 32% of households are renting – and many tenants have been hurt by the artificial support given to house prices, since higher house prices have led to higher rents. 32% of households own their homes outright and therefore have not benefited from lower mortgage rates. The remainder have mortgages, of various sizes and it is this group who have benefited hugely. But how long must the rest of UK households be damaged in order to keep mortgage rates so low?
Government would not be able to impose such redistribution: If George Osborne were to announce a tax increase on middle income groups in order to fund a huge giveaway to the wealthiest households, or if he insisted on taking money from savers and middle class families in the north to give more to borrowers and owners of large houses in the south, there would be an outcry. But when the Bank of England policies achieve effectively the same outcome by introducing policies that help those with the most expensive houses and the wealthiest asset holders, there is hardly any protest. As the impacts are more subtle and less transparent, they occur without sufficient scrutiny. It is time to start analysing these effects more carefully, but so far there has been little interest in doing so. This is because the groups who lose out do not have the political power and those who benefit are the groups who would normally carry out such analysis.
Don’t ignore side-effects of monetary policies: QE has had damaging side-effects on many parts of the economy which would not normally be considered democratically acceptable. The Bank of England is taking over fiscal policy is some respects, but the democratic scrutiny process has so far failed to ensure adequate transparency. Furthermore, buying gilts does not create growth, it just distorts the asset markets. This is not a long-term solution, it is a short-term palliative, but the side effects of the policy must not be ignored. Don’t just look at the theory, look at the facts.
Don’t need more new money: Rather than creating more new money, we should try to make the existing funds work better. There is plenty of money in the economy now, it is just not getting to the right places. Large companies have financed themselves on the corporate bond markets at very cheap rates, financial markets have risen, but there is not enough funding for the real economy.
Growth will come from investing in real assets, not financial assets: Institutional investors such as insurers or pension funds have huge sums of money to invest. Currently, many are buying gilts, even at current low yields, because they feel regulatory pressure to do so. These institutional assets would be far better utilised in the real economy.
Special temporary capital allowances: The Government should provide special capital allowances for investment in new projects by large companies. These use it or lose it special allowances would last for, say 12 months, and apply to spending that begins during that time.
Encourage more infrastructure and housing by private sector: Special arrangements to help pension funds and insurance companies finance infrastructure and housing projects are long overdue. A shortage of housing has kept house prices too high in many parts of the country, which has also driven up rents and damaged younger people’s incomes. Building more homes will help boost growth and also normalise house prices.
Interest rates should start rising sooner rather than later: The economy is no longer in distress mode – yes it is a slow recovery but that is because of the overhang of debts and the ongoing impairment of banks both here and overseas, plus the huge fiscal deficits. Borrowers must start to adjust to financial reality. Such low rates cannot be sustained and the longer they continue, the more distortions they create. I am sure Mr. Carney has other ideas, but I would urge him to look at the facts and consider the consequences of unconventional monetary policies carefully.