The House Of Lords Is Concerned Over A Dangerous Addiction To QE

Selected Central Bank Balance Sheets

The House of Lords is Investigating a Dangerous Addiction to QE

The report is through the eyes of the UK regarding the Bank of England but the comments and concerns apply to every central bank. Here are some snips.

Lords: In the UK, quantitative easing was envisaged, at the point of introduction in 2009, as a short-term measure to support the economy through the global financial crisis. However, over the last decade or so, the programme has expanded substantially, and it has become the Bank of England’s main monetary policy tool.
Mish: It was supposedly going to be short-term everywhere. It wasn't.

Bank of England Balance Sheet

Bank of England Balance Sheet as Percentage of GDP

Lords: We launched this inquiry at this juncture for several reasons. First, the quantitative easing programme has not been subject to sufficient scrutiny, including in Parliament, given its size, longevity, and economic importance. The increased role of the Bank of England in the economy merits enhanced accountability by Parliament. Second, the substantial escalation of quantitative easing during the COVID-19 pandemic was unprecedented. Third, we wished to examine the extent to which quantitative easing has achieved its stated objectives, along with its effects on the real economy, growth, and inflation.

Lords: Professor Tim Congdon, Founder, and Chairman of the Institute of International Monetary Research told us that the use of quantitative easing in 2009 prevented a deflationary spiral from taking place. He said that without quantitative easing, “the quantity of money would have fallen very rapidly”. Adam Posen, President of the Peterson Institute for International Economics, said that quantitative easing “tends to work most powerfully when a financial panic is underway”, but its ability to stimulate spending and investment in stable economic conditions is like “pushing on a string.”
Mish: Pushing on a string is a Keynesian analogy. Yet, it is very clear that QE did not stimulate bank lending in the US, EU, or Japan.

Lords: Professor Philip Davis, Professor of Banking and Finance at Brunel University and a Fellow at the National Institute of Economic and Social Research (NIESR) said there is “some evidence” of pension funds engaging in a “search for yield” through investment in leveraged alternative assets, structured products, private equity, and derivatives. Nigel Wilson, Chief Executive Officer at Legal & General, said that quantitative easing is not the right policy tool for stimulating sustainable economic growth. He said that quantitative easing had boosted asset prices and stabilized financial markets successfully, but that it cannot be expected to create sustainable economic growth, for which an active fiscal policy was needed instead.
Mish: Correct. QE undoubtedly suppressed interest rates, encouraged financial speculation, and hurt pension plan goals. It also kept zombie corporations alive at great expense and hurt price discovery. 

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