Man who started QE now member of committee that slams QE

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There’ll be some ruffled feathers at the Bank of England this morning following the publication of a rather damning report by the House of Lords’ economic affairs committee. From the FT’s economics reporter Valentina Romei:

After an in-depth inquiry into QE — the practice by which the central bank attempts to stimulate spending by creating money and pumping it into the economy by purchasing assets — the House of Lords economic affairs committee said the BoE had not provided sufficient justification for its flagship policy.

The committee’s report will sting inside Threadneedle Street, since one of the authors is former BoE governor Mervyn King and another is Nicholas Stern, former chief economic adviser to the Treasury and chief economist of the World Bank.

Yes, you read that right. The very same Mervyn King who during his time at the Bank introduced the controversial policy is now laying into his successors. We wonder what Merv made of the view of Lord Forsyth of Drumlean, chair of the economic affairs committee, that the bank “has become addicted” to bond buying. Awks…

The committee’s accusation that the Bank had faced too few questions on and done too little to justify the use of QE, despite its “eye-watering” size, meanwhile, took us back to press conferences of yore, when a sharp rebuttal from the then governor was hardly unheard of. Nor was the Bank exactly renowned for its openness during his time at the helm.

To be fair to Merv, we are in a far different place now to where we were in November 2009, when the Bank first started buying bonds. At £895bn the stock is rather higher too. Most importantly, more than a decade on from its introduction across advanced economies in the West, QE can no longer be considered a cure-all for macroeconomic ills.

We think central banks were right to use it. But it’s unquestionable that it has exacerbated inequality by raising asset prices, while wage growth has remained stagnant. We also believe there is far less of a case to make it the main lever of economic policymaking during an event such as the pandemic than there was when the world was in the throes of a banking crisis. Back then, QE was essential to soothe market tensions and keep lenders open for business. This time around, the banking system is in relatively decent health.

However, we don’t think any central banker is claiming QE is a panacea. There’s consensus that fiscal policy needs to play a more outsize role right now. And direct transfers from the state to workers have indeed been the main feature of the economic policy response to the pandemic. The questions are more one of whether QE can complement those fiscal transfers, and whether doing so risks compromising central banks’ independence from politics. Ultimately, they’re fair ones to ask. Regardless of whether the person who’s asking them also had a big role in starting the whole thing.

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