Check out Dan Conaghan, author of The Bank: Inside The Bank of England, on the Financial Times' Alphaville blog, calling for a formal inquiry into quantitative easing.
Time for a formal inquiry into British QE
On the third anniversary of the launch of quantitative easing in the UK, Dan Conaghan, author of The Bank – Inside the Bank of England, believes the Treasury Select Committee needs to take a fresh detailed look at Britain’s approach to monetary easing.
Perhaps there will be celebrations this week in the Parlours of the Bank of Engl
and for the third anniversary of QE. Three cheers from Sir Mervyn King, Paul Tucker and Paul Fisher? The Bank’s truly grand projet, a giant exercise in unconventional monetary policy, has exceeded all expectations, at least in size and scope. And, if the Bank’s economists are to be believed, it has saved us all from economic oblivion.
Will Andrew Tyrie MP and his fellow MPs on the Treasury Committee also raise a glass? Perhaps not. After all, their interactions with the Governor and his team on the subject of QE have often been accompanied by a good deal of puzzlement, scepticism and frustration. They may feel that celebrations are a little premature.
The Committee, which has its October 2011 report into the Accountability of the Bank of England to hand, might well be tempted to take another look at QE at this juncture. The Bank’s Asset Purchase Facility has, after all, prevailed for three years, amassing some £325bn of gilts and generating an estimated £45bn ‘profit’ for HM Treasury.
If Mr Tyrie’s Committee decided to embark on a modest inquiry into the cause, effects and unintended consequences of QE, where might it look for its evidence?
It could start with the Debt Management Office, the great engine room of the UK’s finances, which issues prodigious amounts of gilts to finance debt and deficit. It could ask the DMO whether the Bank’s purchases have interfered with it sales programme; and whether the triggering of the DMO’s Standing Repo Facility and – eeek! – its Special Repo Facility were not occasioned by emergencies in the gilts market as the Bank hoovered up liquidity.
The Committee could then turn to some of the Gilt-edged Market Makers, or GEMMs, who valiantly act at the brokers for the sale, purchase, lending and borrowing of gilts and who have found themselves in the thick of numerous tangles with the Bank. The Committee could quiz them on how some unscrupulous gilts traders have ‘spivved’ the market, creating spikes in prices of issues which the Bank had pre-announced it would buy.
Having dabbled in the market, the Committee could haul in some suitably independent-minded economists and ask them: what do you reckon? Given that the explicit reason for QE was to mitigate the danger of undershooting the 2 per cent inflation target and given where we are, have been and seem set to stay, was it really necessary? And, while we are at it, are we to believe the Bank’s own claims for the very considerable halo effect of its gilts purchases on numerous other asset classes?
Finally, the Committee could call the Bank in and ask: where does it all end? What is the exit plan? Will the Bank simply dissolve its gilts positions, deleting them at the press of a button, or will it hold them to maturity and, if so, will they be refinanced? Alternatively, will the Bank sell its gilts back into the market and, if it does, will that not collide with the DMO’s own sales programme?
The Bank will no doubt have good, rigorous and robust answers to many of these questions and it will continue to make a convincing case for Quantitative Easing per se. But it may admit, in the face of an equally convincing body of evidence, that what began as an experiment has become institutionalised, with very little oversight and very little regard for the sensitivities of the markets.