Economy Committee

:00:29. > :00:34.Order, order, thank you very much for coming to see us. As you can see

:00:35. > :00:40.by looking in our direction, the whole committee without exception is

:00:41. > :00:46.operated take evidence from you this afternoon which is the importance

:00:47. > :00:52.that the committee attaches to this subject. Can I begin with the

:00:53. > :01:01.question of political economy, maybe to you, Sir Charles. We created on

:01:02. > :01:05.an emergency basis are very in usual arrangement -- a very unusual

:01:06. > :01:08.arrangement where the bank acquired a huge stock of bombs on its balance

:01:09. > :01:19.sheet for which the Treasury, that is the taxpayer out there, voted. --

:01:20. > :01:25.they have to bear an indemnity. And the bank has virtual total control

:01:26. > :01:34.over what happens to that stock of bonds. And may make errors costing a

:01:35. > :01:39.fortune at sometime in the future. Added to which, sitting alongside,

:01:40. > :01:46.you could argue, outside the formal remit of the MPC, is the task of

:01:47. > :01:48.managing and running of the stock. Have you got the accountability

:01:49. > :01:52.arrangements right, what are we going to do for that future, can we

:01:53. > :02:00.carry on like this indefinitely? I think you are right to raise this is

:02:01. > :02:05.an issue. It is something we are conscious of when the asset purchase

:02:06. > :02:11.facility was set up first in 2009. It is a vehicle that is owned by the

:02:12. > :02:18.Treasury, the Treasury has the financial interests, so any gains or

:02:19. > :02:25.losses ultimately impinge on the taxpayer. And there are two

:02:26. > :02:33.particular aspects which are worth drawing attention to. Firstly, it

:02:34. > :02:40.explains why every time the MPC wants to make additional asset

:02:41. > :02:45.purchases, it has to get the consent of the Chancellor. That was quite

:02:46. > :02:51.deliberately, if you like, to try and tie the fiscal authorities into

:02:52. > :02:58.the decision. So you could have a situation further down the road

:02:59. > :03:05.where people said, the MPC bought X billion of gilts and have made a

:03:06. > :03:09.loss, this is all on the taxpayer, who gave them the right to do that?

:03:10. > :03:15.So there would also matter could be shed was once ability now with the

:03:16. > :03:22.Treasury. -- there would automatically be shared

:03:23. > :03:26.responsibility. And it also accounts to why the bank has hitherto been

:03:27. > :03:33.very reluctant to go beyond buying predominantly gilts as a counterpart

:03:34. > :03:36.to expansion... Which has in turn has aggravated the distributional

:03:37. > :03:41.consequences, and had a distorting effect. Even if we had been buying

:03:42. > :03:47.other assets, there would still be distributional consequences. It is

:03:48. > :03:54.worth saying that to the extent that the MPC in gauges in buying a lot of

:03:55. > :03:58.private securities, corporate bonds, mortgage-backed securities,

:03:59. > :04:04.equities, you could have a very big range of assets it might buy, there

:04:05. > :04:08.is obviously the potential on those of losses. Also if you are buying

:04:09. > :04:16.private credit instruments, inevitably, you raise the question

:04:17. > :04:19.about which companies, which securities you are buying, should

:04:20. > :04:28.they favour a particular path. That also has a significant political

:04:29. > :04:36.economy dimensional. And for that reason, bank management always

:04:37. > :04:40.wanted to try and, if you like, plain vanilla quantitative easy,

:04:41. > :04:44.focusing largely on gilts. That is explaining where we are. That is not

:04:45. > :04:49.where we are asking, which is where do we go from here, can we carry on

:04:50. > :04:54.indefinitely with the management of the stock in this is shape and with

:04:55. > :05:01.this line of accountability? And is there a case for some other set of

:05:02. > :05:08.arrangements to be put in place? There is certainly an issue... To

:05:09. > :05:13.complete that question, after all you yourself said that it is partly

:05:14. > :05:17.fiscal policy, not appear monetary policy. Indeed and I think a central

:05:18. > :05:21.banks have felt uncomfortable about the extent to which they have been

:05:22. > :05:29.polled more and more into territory which is rightly the domain of an

:05:30. > :05:33.efficient. -- the domain of politicians. We would like to get

:05:34. > :05:38.back to the world of nice simple plain vanilla monetary policy where

:05:39. > :05:44.we just manipulate the short-term interest rate. One thing which is

:05:45. > :05:50.worth saying, I think it is unlikely that the asset purchases that have

:05:51. > :05:55.been made hitherto will lead to a significant cost to the taxpayer, in

:05:56. > :06:03.fact, quite the opposite. Stimpy because -- simply because of the

:06:04. > :06:10.consequences of the gilts being born, it is very unlikely that there

:06:11. > :06:16.will be losses to the taxpayer, and the expectation that is that there

:06:17. > :06:20.will be a substantial profit. It should be noted that Sir Charles has

:06:21. > :06:26.entered the forecasting business. Circumstances can change. They can

:06:27. > :06:32.but it would mean a very big change in the future path of the underlying

:06:33. > :06:38.natural interest rate in the world economy to invalidate what I have

:06:39. > :06:42.just said. Be you have any suggestions on the accountability

:06:43. > :06:47.issue that I am raising today that we should consider, as a group? It

:06:48. > :06:55.is a good question, what you might want to put in place to strengthen

:06:56. > :06:58.it. Clearly, you are already holding the MPC to account through the

:06:59. > :07:04.regular hearings after the inflation report, and that encompasses the

:07:05. > :07:11.asset purchases. The question is whether you need to bolster that in

:07:12. > :07:17.some way. And I think it is worth just noting that although I pointed

:07:18. > :07:23.out that to expand the facility required the formal consent of the

:07:24. > :07:30.Chancellor, running down the... Exactly. Running down the facility

:07:31. > :07:34.as I hope will happen at some stage in the future, does not formally

:07:35. > :07:41.required the Chancellor. Which is an unusual asymmetry. Well, except that

:07:42. > :07:47.of course, running down will be associated with putting upward

:07:48. > :07:50.pressure on longer-term yields, and most chancellors would be happy to

:07:51. > :07:56.see the lower yields, because it is reducing the cost of financing the

:07:57. > :08:01.deficit. But therefore will not like it so much when it goes into

:08:02. > :08:05.reverse. So I think there would be a problem saying that the Chancellor

:08:06. > :08:08.also... You have just touched on one of the moral hazard aspects of this

:08:09. > :08:17.that requires some discipline. Indeed. To beat -- to be imposed by

:08:18. > :08:22.Parliament by the executive, can I ask you to think about that and come

:08:23. > :08:27.back to us on that? I would like your considered suggestions outside

:08:28. > :08:36.this, if you could write to us. Professor Miles. I want to offer a

:08:37. > :08:39.thought on the longer run. At some point, the degree to which you want

:08:40. > :08:44.monetary policy to be expansionary will diminish, I hope we get there

:08:45. > :08:47.in my life and within a few years, hopefully. At that point it makes

:08:48. > :08:53.sense to start selling most of the assets that it indeed area. I do not

:08:54. > :08:58.think that -- that sit in the area. I do not think that is the problem

:08:59. > :09:03.with most of the assets that sit in the bank in England. The funding

:09:04. > :09:08.that has been made for the purchases so far, the counterpart on the

:09:09. > :09:11.liability side of the balance sheet is the reserves of the banking

:09:12. > :09:18.system. The reserves before the financial crisis, that the

:09:19. > :09:21.commercial banks held in the Bank of England were tiny. In retrospect,

:09:22. > :09:29.ludicrously less than should have been held given that we know now...

:09:30. > :09:34.There is a target for a larger balance sheet, but not here. I am

:09:35. > :09:40.trying to move the discussion on. I dig it is relevant to monitoring how

:09:41. > :09:43.the -- I think it is relevant to monitoring how the asset side is

:09:44. > :09:46.structured. Supposing the commercial banks want to continue holding as

:09:47. > :09:51.many reserves as they have got at the moment, for monetary policies

:09:52. > :09:55.purposes, the gilts. To be sold but they could be essentially bought by

:09:56. > :10:00.another bit of the back. At that point, most of the assets will not

:10:01. > :10:07.be sold, they will sit in another part of the bank which will not be

:10:08. > :10:13.the response -- responsibility of the MPC but of the executives of the

:10:14. > :10:16.bank who are responsible for the overall balance sheet. They will use

:10:17. > :10:19.a different criteria from the monetary policy committee to decide

:10:20. > :10:25.what kind of assets they should hold. Can I ask you to also think

:10:26. > :10:29.about what you might drop us a line on on this field in a longer term?

:10:30. > :10:34.Detlev Schlichter, you are new to the committee, these two are old

:10:35. > :10:41.hands, with one hat on or another, with Sir Charles, several hats! What

:10:42. > :10:46.do you think about this issue? I think I agree with Sir Charles that

:10:47. > :10:54.at first, I think the operation of Q E is more profitable for the central

:10:55. > :10:58.bank, as is the case with all of the central banks. They are creating

:10:59. > :11:03.bank reserves which are the deposits that the banks hold with the central

:11:04. > :11:07.banks, and usually in our environment, the central banks have

:11:08. > :11:20.to pay no interest on those reserves. They've buy bought

:11:21. > :11:27.interest raising assets as part of the quantitative easing. I am not

:11:28. > :11:32.familiar with the specifics of central bank accounting in this

:11:33. > :11:35.country, but I am assuming, most countries, the central banks give

:11:36. > :11:39.the profits back to the Treasury and in that sense, the Treasury pays

:11:40. > :11:48.coupons on government bonds that are held by the central bank, and that

:11:49. > :11:51.becomes central bank profits which goes back to the Treasury. As long

:11:52. > :11:57.as it holds, that is not a problem. It would arise if you were to be in

:11:58. > :12:01.a situation where the central bank wants to off-load these assets and

:12:02. > :12:05.do this in a market environment which realises much lower prices for

:12:06. > :12:10.this. Maybe a high inflation environment, that could be the case.

:12:11. > :12:19.Again I do not think that is very imminent, so I do not think the idea

:12:20. > :12:22.that the Q E operation is in the immediate future problem, I do not

:12:23. > :12:28.see that as an issue. That is not what I was asking. OK, we make a

:12:29. > :12:32.profit, it might be a profit that could have been larger or it may be

:12:33. > :12:40.a profit that for various reasons, politicians might have decided not

:12:41. > :12:46.to realise at that time, had they control of the assets. It is an

:12:47. > :12:50.accountability issue rather than what... Perhaps you would reflect on

:12:51. > :12:54.it as well. I will move the questioning on. We have spent some

:12:55. > :13:00.time on this already and I know that we have follow-up questions.

:13:01. > :13:09.I think you have broadly covered it, but thank you. I wanted to ask about

:13:10. > :13:18.the distorted effect of Q E. When we had the governor here last time

:13:19. > :13:22.before one, he denied that Mr -- he denied that QE had pumped asset

:13:23. > :13:26.prices, do you think that is correct? Has the ultralow interest

:13:27. > :13:34.rate of Akrotiri inflated asset prices? I am not familiar with what

:13:35. > :13:38.he said. It strikes me as strange to suggest that QE would have no effect

:13:39. > :13:44.on asset prices. It was a throwaway remark. It is precisely the primary

:13:45. > :13:51.mechanism, how it is supposed to stimulate demand, that the bank buys

:13:52. > :13:59.gilts, pays for it with issuing extra reserves, people do something

:14:00. > :14:05.with those reserves, that are being issued, that pushes up asset prices

:14:06. > :14:13.in general, corporate bond prices and so forth. And that encourages

:14:14. > :14:17.investment and higher wealth, and that stimulates demand Jarecki. That

:14:18. > :14:22.is the classic transmission methods -- directly. It is the classic

:14:23. > :14:27.transition method, the portfolio balancing. There are some other

:14:28. > :14:30.mechanisms but I think from the MPC, we always thought that with the

:14:31. > :14:36.primary route through which QE operated. The empirical evidence,

:14:37. > :14:47.looking at so-called event studies, which is where you look at the

:14:48. > :14:54.responses of market prices to announcements of QE programmes,

:14:55. > :14:59.suggests that certainly in 2009, when we in the Fed started buying

:15:00. > :15:09.assets, that purchases worth around 10% of GDP lower ten -- lowered

:15:10. > :15:10.10-year bond yields by little under 100 percentage points. That had

:15:11. > :15:20.effects for all asset prices. Are there asset classes where the

:15:21. > :15:28.effect is marked or is it generalised? I think at the point

:15:29. > :15:37.when asset purchases were being undertaken at its most rapid rate in

:15:38. > :15:42.2009, in 20092 ?200 billion of guilts were bought. At the point

:15:43. > :15:48.where the asset purchases began, a year later, the market was operating

:15:49. > :15:56.more smoothly. Over the one year period, the reduction in corp rate

:15:57. > :16:03.bond yields was enormous, far more than the reduction in guild yields.

:16:04. > :16:09.I thought at the time it was to sort out high yields in the corp rate

:16:10. > :16:16.bond market. The yield on the more risky corp rate bonds fell by 20%

:16:17. > :16:24.over that year. 20%. Guild years fell by 1%. Partly to do with QE. We

:16:25. > :16:28.were buying guilds and the people that bought looked for an

:16:29. > :16:35.alternative asset. So it had a big impact on the prices then. I think

:16:36. > :16:39.it's been much less since then. There were various studies by the

:16:40. > :16:43.Bank of England, the quarrel bulletin, for 2011, the UK's

:16:44. > :16:50.quantitative easing policy design operation and impact and the staff,

:16:51. > :16:56.the working paper from October last year, all of these studies find

:16:57. > :17:03.quantitative easing did have impact on lowering Government bond yields,

:17:04. > :17:08.compressing corp rate bond spreads and potentially boosting equity

:17:09. > :17:12.prices and weakening sterling. And Sir Charms is correct, this is by

:17:13. > :17:17.design. The policy is intended to change market prices. The question

:17:18. > :17:23.from my point of view is that it advisable in the long run but if the

:17:24. > :17:26.goal was to implement a policy that changes market prices, according to

:17:27. > :17:31.the study of the Bank of England, that has been achieved.

:17:32. > :17:36.Does that present increased stability risk for the future? I

:17:37. > :17:40.think that the first impact of that, if we assume without the policy,

:17:41. > :17:45.obviously, yields would have been higher. And quoting the research

:17:46. > :17:52.from the Bank of England, without the policy, yields would be higher,

:17:53. > :17:57.worn rate bonds wider, and equity prices lower, maybe house prices

:17:58. > :18:02.lower, the first thing to recognise by the policies, is that they create

:18:03. > :18:07.winners and losers. So the idea, the debate on quantitative easing that I

:18:08. > :18:14.find a problem is that it talks about aggregates. So it boosts GDP

:18:15. > :18:21.or increases price levels and does so by creating winners and losers,

:18:22. > :18:26.by distributing some companies win, some sectors win, others lose. The

:18:27. > :18:28.economy is not just performing at a high level, it's a different

:18:29. > :18:32.economy, you have changed the operation of the economy. So in my

:18:33. > :18:38.view that's a dangerous direction to take for the reason that we would

:18:39. > :18:43.assume in a market, you know, Forsythe example, corporate bond

:18:44. > :18:48.spreads or the yields on the Government bond yield curve gives us

:18:49. > :18:54.information about the pre-rations of savers and investors that reflect

:18:55. > :18:58.the true underlining of corporate debt, so for this to change the

:18:59. > :19:02.markets and change the price behaviour, that is a problem.

:19:03. > :19:12.I have a slightly different perspective on that. I don't dismiss

:19:13. > :19:17.the concerns, what is true is that there is a significant actor in the

:19:18. > :19:22.market, clearly affecting the relative rates of return.

:19:23. > :19:28.It is certainly creating or has distributional effects.

:19:29. > :19:33.It is worth recognising the monetary policy always has distributional

:19:34. > :19:38.effects, even through the conventional short-term policy rate.

:19:39. > :19:43.The significant difference here is that with normal business cycles,

:19:44. > :19:48.people accept sometimes the interest rate is higher, sometimes it's a bit

:19:49. > :19:53.lower, sometimes unemployment goes up, sometimes it goes down. There

:19:54. > :19:58.are swings and rounds about. What marks out the current episode is

:19:59. > :20:03.that it has gone on so long. When we embarked on QE. I thought we would

:20:04. > :20:09.be reversing it. Of course, two years, once the emergency was over,

:20:10. > :20:16.yet here we are, it is almost a decade since the financial crisis

:20:17. > :20:20.started, and we still have a large balance sheet and the bank is

:20:21. > :20:31.marginally adding to it at the moment. The Fed has just started to

:20:32. > :20:36.normalise policy, when I left the MPC in 2014, I expected well towards

:20:37. > :20:40.the end of that year that maybe the bank would be starting to raise

:20:41. > :20:46.rates but they have cut it. So the episode has gone on longer. Which I

:20:47. > :20:52.think has made people more conscious of the distributional consequences.

:20:53. > :20:58.Than would have been the case with regards this if this had been more

:20:59. > :21:05.short-lived. I know you have done work on the

:21:06. > :21:11.this, the housing market? I suspect that there was a bit of impact of QE

:21:12. > :21:15.on the housing market. I don't think it is the strongest impact of QE.

:21:16. > :21:21.But it probably brought down the prices of some mortgages a bit. Most

:21:22. > :21:25.mortgages sold in the last 10 years have been short-term fixed rate

:21:26. > :21:31.mortgages, the pricing of which is sensitive to the position of the

:21:32. > :21:35.yielding, not just the Bank of England rate. So it probably made

:21:36. > :21:42.mortgages cheaper than they otherwise would have been. Although,

:21:43. > :21:44.there are other long-term fundamental factors behind the

:21:45. > :21:51.rising of house price factors that have little to do with QE.

:21:52. > :21:57.Also, I must declare an interest, I own a business that operates in the

:21:58. > :22:03.commercial finances market, it is whether you have looked at or

:22:04. > :22:08.considered the anti-except I have impact of QE and the other measures

:22:09. > :22:13.that the bank has taken to the extent that big players in the

:22:14. > :22:18.market have access ofly quiddity getting low rates, so they are able

:22:19. > :22:24.to dominate over smaller players, the way that they have in the not

:22:25. > :22:32.been able to in the past, which distorts the market in that way. Is

:22:33. > :22:37.there a look at how the QE effectively gives advantage to the

:22:38. > :22:42.bigger markets much more? I have to say I'm not aware of any work that's

:22:43. > :22:47.been done. I can't remember anything that we have done, the bank, they

:22:48. > :22:51.may have done something subsequent to me leaving ares of course. There

:22:52. > :22:58.may have been work on the financial stability side that I was not aware

:22:59. > :23:00.of. Equally I'm not aware of any work in the academic work since I

:23:01. > :23:07.have left. No.

:23:08. > :23:11.It is an interesting phenomena, marketwise with one large dominant

:23:12. > :23:18.player, RBS through Lombard who do not operate under the same rules of

:23:19. > :23:25.moral hazards and share holders and the rest of it, and also have access

:23:26. > :23:32.to cheap funding from the Central Bank and my impression is that it is

:23:33. > :23:36.disstarting lending. But if nobody has looked at it, nobody is bothered

:23:37. > :23:41.about the effect on me and my business but there we are! I

:23:42. > :23:46.wouldn't go that far. One thing, I think that I'm right in

:23:47. > :23:52.saying that there are a large number of banks and small banks who want

:23:53. > :23:56.access the Bank of England's lending facilities, the discount window

:23:57. > :24:01.facilities, the new term funding scheme, a successor to the funding

:24:02. > :24:06.for lending scheme, so those operations that allow banks to brow

:24:07. > :24:09.for relatively long periods at very low interest rates, bank rates, that

:24:10. > :24:13.is not just the big banks can do that.

:24:14. > :24:18.That is true, you need a banking licence and it benefits if you can

:24:19. > :24:21.operate a scale but the small challenge banks don't have the

:24:22. > :24:26.scale. They have the charge rates that allows them to cover the

:24:27. > :24:31.administrations costs but that is disproportionate to them.

:24:32. > :24:36.Sir Charles, have you or the committee done analysis on what

:24:37. > :24:42.might have happened without the QE programme that the bankers pursued

:24:43. > :24:50.over eight years? Yes. The studies that have been carried out about the

:24:51. > :24:56.impact of QE are implicitly telling looking at how they would have done

:24:57. > :25:00.it. The so-called event studies, for the UK and for other companies that

:25:01. > :25:09.suggestion that at least during the worst of the great recession, that

:25:10. > :25:14.10% of GDP bullet purchases would knock about 100 basis points often

:25:15. > :25:19.year yields but if we had not done that, the yields would have been 100

:25:20. > :25:22.points higher. Where it becomes tenuous is the more interesting

:25:23. > :25:31.question about what was the impact of that on the real economy? And as

:25:32. > :25:41.my next question is inflation... OK. So the bank certainly, while I was

:25:42. > :25:46.there, did work to assess the impact of the cons consequent changes in

:25:47. > :25:59.rates and asset pirateses on the QE programme, how it might have

:26:00. > :26:09.impacted GDP inflation -- asset prices.

:26:10. > :26:13.I have the prices here. Three or four different methods here, that

:26:14. > :26:20.come out on average. The first impact of the first round of QE was

:26:21. > :26:30.?200 billion from sterling in March 2009 to 2010. And about

:26:31. > :26:33.three-quarters of a percent to 1.5% on CPI.

:26:34. > :26:40.The key thing to say about the numbers is that they are not

:26:41. > :26:49.independent assessments of that monetary impulse. The way they were

:26:50. > :26:55.calculated was taking the interest rate responses, that you get from

:26:56. > :27:01.the event studies, and using standard multipliers from the past

:27:02. > :27:11.about how investment and consumption is affected by given change and

:27:12. > :27:19.interest rates. Was there understated impact over

:27:20. > :27:26.that time, over the crisis? That possibly QE, one might say, staved

:27:27. > :27:31.off a sense of crisis and a general lack of money supply, that may have

:27:32. > :27:37.had far less consequences than the Moines you mentioned? I think that

:27:38. > :27:42.is possible. My view is that the first round of QE, 2008, 2009 was

:27:43. > :27:48.likely to be effective not just because of the asset price effects

:27:49. > :27:52.that we have been talking about but the signal sent to the authorities

:27:53. > :27:58.that they were determined to put a flaw under the collapse in the

:27:59. > :28:03.market and all sorts of mistakes in the great depression when GDP

:28:04. > :28:06.collapsed to 25% in the US. So that was a consequence that was

:28:07. > :28:17.important. Are you suggesting that but for QE,

:28:18. > :28:22.2008 and-2010 may have been hit more by depression? It would take more

:28:23. > :28:26.than that. A lot of big mistakes that the Fed and other actors made

:28:27. > :28:36.in the period but I think it helped to put a flaw and stop demand

:28:37. > :28:43.continuing to contract after the initial hit consumption, the

:28:44. > :28:47.collapse of Lehmans. And the initial expectation of this

:28:48. > :28:51.being put in place would be two to three years, it is now almost eight

:28:52. > :28:56.years. The 8th anniversary is probably in a couple of week's time.

:28:57. > :29:02.What conditions do the members of the panel think would have to apply

:29:03. > :29:09.before we inwind QE and what might the consequences be when we do? Can

:29:10. > :29:14.I start with Professor Miles? It is when the economy looks like it is

:29:15. > :29:18.building up more of a head of steam than we have seen over the last few

:29:19. > :29:21.years. And inflation, which in the

:29:22. > :29:26.short-term is going to go above the target level for sure but looks more

:29:27. > :29:30.sustainably will be hovering around the target level. I think that

:29:31. > :29:35.position we may reach soon. I think that the first step would be to

:29:36. > :29:40.start increasing the bank rate off the floor and that would be welcome.

:29:41. > :29:43.That is on a good day. Why would you increase the rates

:29:44. > :29:54.first, rather than unwind QE first? I have two thoughts, one, I think

:29:55. > :29:58.that there are unfortunate side-effects, by having it so very

:29:59. > :30:02.low. But they are probably more serious than the bank holding ?400

:30:03. > :30:06.billion of guilt. I would like to see that as the first step. What are

:30:07. > :30:13.those consequences which concern you? It is squeezing margins within

:30:14. > :30:18.the banking sector, we probably have got to a level where some banks find

:30:19. > :30:22.it difficult to live with such a low level of bank rate, that problem is

:30:23. > :30:29.less bad than it was a little while ago. But, it still has not entirely

:30:30. > :30:34.gone. I think, if you want to achieve a certain reduction in the

:30:35. > :30:40.expansiveness of policy, my own feeling is it is a very good idea to

:30:41. > :30:48.do it on bank rate first, and the QE sales can come later. Thank you. May

:30:49. > :30:52.I expand on that? First of all, the squeeze on bank profit margins. It

:30:53. > :30:56.is worth saying the reason we stopped at a halfback in the early

:30:57. > :31:02.2009, rather than going in lower, it is precisely because of the

:31:03. > :31:06.potential adverse effects of squeezing bank profit margins even

:31:07. > :31:11.more. Firstly, it might have led to more than falling over, which would

:31:12. > :31:15.have been bad for general confidence, and secondly, that

:31:16. > :31:18.squeeze on bank margins could lead to an impairment, further

:31:19. > :31:22.impairment, in the supply of credit. Obviously, over the last year, the

:31:23. > :31:29.banks look at that again and decided it could safely cut a bit more to a

:31:30. > :31:37.quarter. But, like David, I think there is an argument at least for

:31:38. > :31:44.wanting to try and reverse that, when circumstances are appropriate.

:31:45. > :31:49.Secondly, there are more pragmatic reasons for wanting to get bank

:31:50. > :32:01.rates clear of what you regard as its floor before you start actively

:32:02. > :32:07.selling the APFs assets. That is because you have two set out a

:32:08. > :32:12.programme of asset sales, you do not try and sell 100,000,000,001 day,

:32:13. > :32:20.and sold 25 billion the next over the six months, you do it slowly to

:32:21. > :32:24.keep the markets orderly. Of course, there is always a possibility that

:32:25. > :32:29.you might have an adverse shock over that period and if you have the bank

:32:30. > :32:37.rate clear of the floor, you can cut it. Bank rate becomes the marginal

:32:38. > :32:43.policy. And we certainly took the view, I think it is the right

:32:44. > :32:46.review, you only want to start a programme of asset sales when you

:32:47. > :32:53.are reasonably confident and well clear of the floor, and can do it in

:32:54. > :32:57.a methodical manner of reasonable period. Do you concur with your

:32:58. > :33:02.colleagues on this question? Not quite. If I come back to your

:33:03. > :33:12.question, what are the requirements for us to move to a higher bank

:33:13. > :33:16.rate... At the first QE rate? For either of these things to happen, we

:33:17. > :33:26.would need to see a complete change in the philosophy of the central

:33:27. > :33:29.banks, and monetary policy. They need to assume responsibility, and

:33:30. > :33:34.managed and in the economy. They would not get out of this QE

:33:35. > :33:40.situation in my view. If you have a look globally, or central banks, the

:33:41. > :33:45.first was the bank of Japan in 2000, 2001. None of the central bank so

:33:46. > :33:50.far have been managed to reduce their balance sheet is at all.

:33:51. > :33:57.Ahead, in terms of normalising policy, there is the Federal

:33:58. > :34:00.reserve, managing two hikes in two years. All central banks have moved

:34:01. > :34:07.themselves into the central position. So, step back and say, how

:34:08. > :34:12.can they move into this position? We need to go back. In the Bank of

:34:13. > :34:24.England, between 1997 and 2007, reserves grew by 11% on average

:34:25. > :34:30.every year. That is the nominal monetary growth over a 10-year

:34:31. > :34:35.period every year. -- phenomenal. Why was it done? It was at a time of

:34:36. > :34:38.fairly low inflation because of structural changes, and the governor

:34:39. > :34:44.of the Bank of England explained to this committee about effects like

:34:45. > :34:49.China, the Internet, whatever it was. It was taken as an opportunity

:34:50. > :34:53.to run a bit more of a positive expansion on monetary policy.

:34:54. > :34:58.Inflation would have been lower than 2% if the central bank did not run a

:34:59. > :35:03.more expansionary policy. This policy has affected other parts of

:35:04. > :35:13.the economy. We discussed how it created housing bubbles and massive

:35:14. > :35:19.growth and bank balance sheets. It created accumulation, you see

:35:20. > :35:26.massive growth in a pile of debt. It all came to an end in 2007, 2008. It

:35:27. > :35:30.was a global phenomenon. QE is the logical step, now that they reach

:35:31. > :35:35.lower ground, all of the central bank 's had to buy assets to keep

:35:36. > :35:39.this policy in place. The policy is geared to keep the economy from

:35:40. > :35:46.contracting and at the same time, keeps the debt pile high up. The

:35:47. > :35:51.global economy... The UK coming has an average of 15% GDP since the

:35:52. > :35:56.crisis, made up of public sector really averaging. The top has not

:35:57. > :36:00.changed in this country. In the US, the private sector is higher than

:36:01. > :36:06.2007 when the crisis first started. There is no leveraging in Japan. Now

:36:07. > :36:14.the central banks are stimulating the economy through monetary means,

:36:15. > :36:18.which have an extensive debt location, on the margin, monetary

:36:19. > :36:23.policy becomes less powerful. It becomes ever more difficult to get

:36:24. > :36:28.that extra effect. The diminishing return of monetary policy is

:36:29. > :36:31.massive. And even documented by the Bank of England, when we've talked

:36:32. > :36:37.about quantitative easing. My prediction has to be over the next

:36:38. > :36:42.few years if we see an economic downturn, then we are back to more

:36:43. > :36:46.QE, in all of these economies. I think, unless we see a fundamental

:36:47. > :36:50.change in what monetary policy is about and what it should or should

:36:51. > :36:55.not do, I think we are digging a deeper hole. One quick question and

:36:56. > :36:59.a quick reply if we can... The final question was, that was interesting,

:37:00. > :37:03.you are predicting QE is here to stay for ever. You mentioned there

:37:04. > :37:08.are winners and losers created by the policy, can you briefly outline

:37:09. > :37:12.who you think they are? We will come onto distribution issues in more

:37:13. > :37:16.detail. Can you be brief? It is difficult to say in the short run, I

:37:17. > :37:23.could not even say about pensions, it is very compensated, it depends

:37:24. > :37:28.on your financial position. Recently -- complicated. People who had a big

:37:29. > :37:33.share of their portfolio, it went well and are located in financial

:37:34. > :37:38.assets, benefited. The average household in the UK holds ?1500 in

:37:39. > :37:42.bank deposits, that they have certainly lost. People who have more

:37:43. > :37:46.financial assets tend to be wealthier people and tend to be

:37:47. > :37:51.older. So, there are intergenerational aspect as well. It

:37:52. > :37:55.is very difficult to disentangle all of these effects because the Bank of

:37:56. > :37:59.England has a point when, would there have been more job losses?

:38:00. > :38:03.Potentially, but more companies have closed if these policies had not

:38:04. > :38:08.been done. It is difficult to weigh up all of these impacts. But I think

:38:09. > :38:13.my biggest concern is simply there is no way out of this. A moment ago

:38:14. > :38:18.you said this is a fundamental change in policy. There's no way

:38:19. > :38:19.out. I think that is a good due for Steve

:38:20. > :38:27.questions put are not good afternoon, for Steve Baker to ask

:38:28. > :38:32.some questions. I endorsed his excellent book. Since it is riven

:38:33. > :38:39.today, I should say that I am a seed investor in Glen pay which falls

:38:40. > :38:43.below the deplorable threshold. One of the things I wanted to ask about,

:38:44. > :38:48.I want to come onto ultralow interest rates. For about eight

:38:49. > :38:52.years, with had monetary policy, interest rates, at a level the

:38:53. > :38:55.governor described as extraordinary, if not emergency. Now, I would like

:38:56. > :39:00.to come back to this point about aggregate demand. It seems to me

:39:01. > :39:06.this approach of stimulating the economy through... It is

:39:07. > :39:11.fundamentally Dickensian in producing lower interest rates. I

:39:12. > :39:17.want to give the opportunity to talk about, why it is you think that

:39:18. > :39:25.policy has not produced the effects which were expected, why it has

:39:26. > :39:32.taken longer than expected to get out the position, and where you

:39:33. > :39:36.think it leads? Yeah, I think as I partially referred to in the

:39:37. > :39:42.previous answer, it is... If monetary policy... I think Charles

:39:43. > :39:44.was correct when he said earlier, every kind of monetary policy has a

:39:45. > :39:55.distorting effect. Even when we have convention in Melissa Reid policy.

:39:56. > :39:58.It normally lowers interest rates, and I would call it officially

:39:59. > :40:06.making credit cheaper and encouraging borrowing. In the short

:40:07. > :40:10.run, it is interesting if you look at the analysis the Bank of England

:40:11. > :40:16.has done about QE, from what I can see, they correctly give them credit

:40:17. > :40:22.for lowering borrowing costs and encouraging extra credit and giving

:40:23. > :40:26.a stimulating effect to the economy in the short run. My question is the

:40:27. > :40:30.long runs of the effects of the policy. When that effect is played

:40:31. > :40:38.out, the economy is highly acrid, highly indebted. -- is more highly

:40:39. > :40:45.indebted. Without going too much into economic modelling and every,

:40:46. > :40:49.there's a line of thought that would save the extent to which we can

:40:50. > :40:57.create credit in the economy depends on how much voluntary saving we have

:40:58. > :41:01.on the other side. Interest rates affect the relative price which

:41:02. > :41:03.helps us allocate savings and determine to what extent the Conley

:41:04. > :41:09.can build up and sustain the capital structure that

:41:10. > :41:17.pays off in the long run -- the economy. It is a productive

:41:18. > :41:21.structure which gives return further down the road. That is what low

:41:22. > :41:26.interest rates do. If they are artificially lowered you have a

:41:27. > :41:29.higher build-up of credit. You have more investment, which at first

:41:30. > :41:36.sounds good but they may not be supported by the voluntary decisions

:41:37. > :41:40.of the public. It is, if you like, an artificial credit boom. Central

:41:41. > :41:45.banks can do that and in the short run we see the effect of shorter

:41:46. > :41:50.growth, high employment and high inflation. All of the effects

:41:51. > :41:54.between 1997 and 2007 but it comes at the effective distorting the

:41:55. > :42:01.economy and capital allocation which ultimately needs to be corrected.

:42:02. > :42:04.One way, to think about a recession, it is not something that happens by

:42:05. > :42:09.accident, where something goes wrong. Something had gone wrong

:42:10. > :42:15.before, before the recession hits. The recession is almost a process by

:42:16. > :42:23.which the economy forces you to go back to some sort of equilibria. The

:42:24. > :42:26.focus on aggregate demand means we can stimulate the Conley in the

:42:27. > :42:31.short run but we do so by always introducing distortions and balances

:42:32. > :42:36.which will come to haunt us later -- the economy. I bought into the same

:42:37. > :42:40.fundamental analysis, but as Sir Charles explained minutes ago come

:42:41. > :42:47.he expected that we would be an wide QE, I think you said. -- unwinding.

:42:48. > :42:55.I don't wish to be critical but seeking the truth. Can you

:42:56. > :43:02.articulate, what is it you think is the analytical difference that when

:43:03. > :43:06.we went to QE, he thought we would be unwinding it by now, but you've

:43:07. > :43:11.always thought we would never escape from QE until it reaches a logical

:43:12. > :43:14.conclusion. What is the fundamental difference in your analytical

:43:15. > :43:21.framework which has always led you to a fundamental different

:43:22. > :43:28.conclusion. I would like to avoid deep discussions on theory. Simply

:43:29. > :43:31.put, I think if you use the word "Stimulus", the way the Bank of

:43:32. > :43:38.England and other central banks look at that word, it almost sounds like

:43:39. > :43:42.you give an initial kick to the economy which gets it going and then

:43:43. > :43:49.moves by itself again, like you start an engine. It keeps running

:43:50. > :43:54.again. While I think if you look in detail at the processes which evolve

:43:55. > :43:58.if you interfere in the monetary processes and inject more money into

:43:59. > :44:02.the economy, create artificially low interest rates, you change it. The

:44:03. > :44:07.fundamental point is, it is not a stimulus that simply gives a

:44:08. > :44:12.commission to the Conley, if that had been the case, I think yes,

:44:13. > :44:18.certainly we should be out by now -- economy. The economy would have

:44:19. > :44:23.responded and it operates again normally. But, in fact, the policy

:44:24. > :44:29.introduces dislocation and, one of those is that there must maintain

:44:30. > :44:34.high debt levels which way on the economy and make it more difficult

:44:35. > :44:38.for inflation to pick-up and more difficult for proactivity to rise.

:44:39. > :44:43.And more difficult for the economy to grow alone so it falls and needs

:44:44. > :44:48.more medication. The economy is overmedicated with monetary policy.

:44:49. > :44:55.So, it's that monetary policy has real effects on the economy and that

:44:56. > :44:59.matters and that explains, if I am correct, that explains the

:45:00. > :45:03.difference in the way the world has worked out compared to what you

:45:04. > :45:08.thought at the start of QE? What's your answer to that analysis you

:45:09. > :45:14.have heard, and if you have an analysis that suggests that is

:45:15. > :45:17.wrong, to what do you attribute the world turning out differently to

:45:18. > :45:23.what you expected when you started? OK. There are extra ingredients that

:45:24. > :45:28.are important to bring into this. It is very important to realise that

:45:29. > :45:33.interest rates are not low solely because of monetary policy

:45:34. > :45:38.decisions. And absolutely key underlying driver

:45:39. > :45:41.of where we are has been the remothersless decline in the

:45:42. > :45:47.underlying real interest rate that is consistent with the economy

:45:48. > :45:55.being, and here this is the world economy, and there's several forces

:45:56. > :45:59.that played into that. Relatively high savings, associated with

:46:00. > :46:03.demographics, partly with the integration of China in into the

:46:04. > :46:07.world economy, a fall off in investment which may partly be

:46:08. > :46:11.associated with a shift in the nature of production away from the

:46:12. > :46:16.physical capital to greater reliance on human capital, where you don't

:46:17. > :46:23.invest so much in opinions, also slower population growth in there, a

:46:24. > :46:27.change in preferences and availability of risk averse,

:46:28. > :46:32.vis-a-vis safe at it, so a number of mechanisms. But it is important to

:46:33. > :46:40.realise that the trend dates back to the starting in the late 1990s,

:46:41. > :46:44.which is prove crisis and is a part of the driver for what actually

:46:45. > :46:50.happened in the crisis, the build up in debt. So I wouldn't put all of

:46:51. > :46:57.the blame on monetary policy, it is a number of things here. There is

:46:58. > :47:03.certainly a significant part of what has been said that I would agree

:47:04. > :47:07.with, so monetary policy has real effects, if it didn't, there

:47:08. > :47:13.wouldn't be much point in us doing it! And more to the point, monetary

:47:14. > :47:20.policy should be expected to fill in dips in the demand. You can use it

:47:21. > :47:25.in a transitory way but you cannot sustain a higher level of demand

:47:26. > :47:29.permanently through running a loser monetary policy and bringing demand

:47:30. > :47:35.from the future to the present, essentially by browing. You do end

:47:36. > :47:39.up building bigger and bigger debt stops and that creates problems

:47:40. > :47:45.further down the road. There may be ways to mitigate the risks but

:47:46. > :47:50.ultimately that is not a world you want to be living in, where the only

:47:51. > :47:59.way you can have demand high enough is by building up bigger and bigger

:48:00. > :48:03.debt stops. So I am at one with Detlev's concerns there. There are

:48:04. > :48:07.more moving parts, perhaps, than he suggested.

:48:08. > :48:14.I think we are all agreed that there are many moving parts. If I may,

:48:15. > :48:18.what I am trying to drive into, given the detailed structural

:48:19. > :48:23.dislocations caused by monetary policy, why is it you think that the

:48:24. > :48:28.world turned out differently, give than the analysis is as you set out,

:48:29. > :48:37.why is it over the last eight years, the world has not turned out as you

:48:38. > :48:47.expected eight years ago, as I think Detlev think it is has turned out

:48:48. > :48:54.the way that he Essex pacted? That we would not escape low interest

:48:55. > :48:59.rates and QE? It takes a lot longer to recover from a downturn

:49:00. > :49:06.associated with a banking crisis and an excessive build up of debt than

:49:07. > :49:12.from a normal cyclicle recession. Why didn't you foresee that at the

:49:13. > :49:18.time we began QE? What was missing that you expected to announce we

:49:19. > :49:23.could unwind QE? Why was it not possible to foresee that? One can

:49:24. > :49:28.make the argument that we should have been more aware of the

:49:29. > :49:34.historical evidence from previous financial downturns. There is an

:49:35. > :49:41.important book that came out, I think in 2009 it was published,

:49:42. > :49:47.which collected a lot of this information together and then there

:49:48. > :49:52.was work that the IMF did that appeared in 2010, 2011. I remember

:49:53. > :49:58.us having discussions on the MPC about the likely speed of recovery

:49:59. > :50:06.interest the downturn. I think it is fair to say we really only became

:50:07. > :50:12.fully conscious of the likelihood of a slow recovery during 2012 with

:50:13. > :50:24.that we had the biggest inroads? I am keen to bring in Professor Miles

:50:25. > :50:29.but can you answer, suppose Detlev is right, that monetary policy has

:50:30. > :50:35.not been allowed to unwind because we have maintained extraordinary

:50:36. > :50:40.monetary policy, could the dislocations explain why the

:50:41. > :50:46.recovery has not been kick-started? I am sceptical of that. When you

:50:47. > :50:51.talk about dislocations, I'm not really sure what you have in mind

:50:52. > :50:57.here. Clearly what is true is if interest

:50:58. > :51:03.rates are low... That encourages investment of sorts. If those

:51:04. > :51:09.investments are mistakenly made on the rates, that the rates stay low

:51:10. > :51:16.forever and they don't, then there is a subsequent... I would like to

:51:17. > :51:22.bring in Professor Miles and I will have Detlev answer that question.

:51:23. > :51:27.Two brief things. The first is, I think, the reason why most people on

:51:28. > :51:33.the committee in 2009 thought that we would be out of the woods, in a

:51:34. > :51:39.sense, by now, and no longer having interest rates as low as they are,

:51:40. > :51:45.was I think then most of us did not think that the damage done by the

:51:46. > :51:49.banking crisis was as bad and as long lasting as it has turned out to

:51:50. > :51:56.be. And that is the answer to that. And maybe we should have. The

:51:57. > :52:02.banking industry, as you will know, it came within a smidgeon of totally

:52:03. > :52:09.collapsing and the damage was much more serious than I thought, even

:52:10. > :52:13.into 2009 and 2010. And one other thing, I do think that the global

:52:14. > :52:19.decline in real interest rates, which is nothing to do with very low

:52:20. > :52:24.nominal interest rates since the crisis or the asset purchases is if

:52:25. > :52:31.anything even more powerful than suggested, that I would date the

:52:32. > :52:37.beginning of the decline in what you may call the global interest rates

:52:38. > :52:43.earlier than Charlie mentioned, I think the 198 #0s. The yield on long

:52:44. > :52:50.dated index bonds when they were launched in the 1980s was 4%. Or so.

:52:51. > :52:56.It declined to about half of that level by the mid- 000s. It carried

:52:57. > :53:00.on that trajectory since then. It is now slightly negative. The Bank of

:53:01. > :53:06.England has not bought any long dated index linked bonds. So I think

:53:07. > :53:11.it unlikely to be strongly related to asset purchases. And the Bank of

:53:12. > :53:14.England sets a short-term nominal interest rate, whereas I'm looking

:53:15. > :53:20.at a long-term real interest rate. So the scale of that decline is

:53:21. > :53:26.absolutely enormous. The extra damage to the banking

:53:27. > :53:35.system that speaks to the dislocations... A quick rejoiner

:53:36. > :53:41.there... What are the dislocations that concern you? So why was the

:53:42. > :53:46.monetary policy not effective, it is as the central bank lost the banking

:53:47. > :53:51.system. The system was expanded before the crisis and as the banks

:53:52. > :53:54.look after the balance sheets, they are obviously under heavier

:53:55. > :54:01.regulation, they are simply not lending. In the 1990s, the bank

:54:02. > :54:07.reserves were 11%. And broader aggregates by 6 to 8%. Because of

:54:08. > :54:16.QE, the last eight years, the balance sheet of the Bank of England

:54:17. > :54:23.grew by more than 20% on each yield average but broader aggregates only

:54:24. > :54:28.by 2 or 4%. That is the reason the recovery is weak and inflation low,

:54:29. > :54:33.so the Bank of England, and other central banks, in spite of a policy

:54:34. > :54:37.of quantitative easing, the impact has been much smaller. My concern is

:54:38. > :54:44.that they are pushing ever harder. Thank you very much. In the latest

:54:45. > :54:49.round of QE, the bank have expanded the range of assets it purchases, it

:54:50. > :54:53.is now purchasing corporate bonds as well. The bank said that the

:54:54. > :54:58.purchases are likely to provide a greater stimulus than that provided

:54:59. > :55:06.so far. Sir Charles and Professor Miles,

:55:07. > :55:11.were you were on the MPC, the assets were not purchased, why was that? We

:55:12. > :55:18.did buy corporate bonds. In 2009.

:55:19. > :55:23.The purpose or the mode of buying was slightly different. So the asset

:55:24. > :55:29.purchase facility, when set up, the first things it bought were the

:55:30. > :55:33.corporate bonds. That was because of the illy quiddity in the corporate

:55:34. > :55:39.bond market and we were acting as a market maker. When the market

:55:40. > :55:44.started to function properly, we exited and sold our holdings. The

:55:45. > :55:50.current conjunction tower, it is more like a conventional monetary

:55:51. > :55:54.policy it is conventional and unconventional, QE but it is not

:55:55. > :56:01.buying guilds but corporate bonds. The first thing to be said is that

:56:02. > :56:11.the corporate bond market in the UK is not huge, the sort of scale of

:56:12. > :56:19.action that we judge was necessary back in 2009/2010. If it was

:56:20. > :56:24.corporate bonds of the market, it could only have ever been a

:56:25. > :56:30.relatively small fraction. The issue that I alluded to in my opening

:56:31. > :56:39.response to the chairman, about the concerns about the sort of lit can

:56:40. > :56:46.call economy aspects of buying private securities certainly was --

:56:47. > :56:51.of political economy aspects of buying private securities certainly

:56:52. > :56:57.was more questionable territory to get into. If we were going to buy

:56:58. > :57:03.private securities it really ought to be as an agent for the Treasury,

:57:04. > :57:09.for the Chancellor. If the Chancellor decided I want you to go

:57:10. > :57:14.and buy corporate bonds or other private credit instruments, that

:57:15. > :57:23.would be fine, the bank would do it but for the QE operation we thought

:57:24. > :57:29.it was sensible to stick to plain vanilla guilts. There are arguments

:57:30. > :57:36.that pound for pound it is effective to buy the corporate bonds bonds

:57:37. > :57:40.than the guilts. You saw them directly effecting the price that

:57:41. > :57:45.might then have an effect on the real economy but the response to

:57:46. > :57:49.that could be well, you just buy proportionally more guilts to get

:57:50. > :57:52.the same net effect at the end of the day. That was the view that we

:57:53. > :57:57.adopted. So do you think that the decisions

:57:58. > :58:02.in this round of QE were the right ones to expand the purchase into

:58:03. > :58:06.corporate bonds more? You can certainly have a debate about

:58:07. > :58:13.exactly what to buy. But I think that them going into

:58:14. > :58:18.that territory, they have exposed themselves more to political economy

:58:19. > :58:23.questions. So I remember one thing that came up, actually at the time

:58:24. > :58:28.that they announced it, one of the investment bonds that they were to

:58:29. > :58:33.buy was Amazon, which at that moment was in the dispute about its tax

:58:34. > :58:39.burden. Of course, there was adverse criticism of the bank for buying

:58:40. > :58:43.Amazon bonds. So the bank is treading into this difficult

:58:44. > :58:48.territory. Personally, I think that if it's

:58:49. > :58:54.going to do that on a significant scale, that is where you have to

:58:55. > :58:55.start thinking more about the sort of accountability framework that

:58:56. > :59:04.sounds it. Professor Miles, what are your

:59:05. > :59:07.thoughts on the new strategy? When I was on the committee, I was pretty

:59:08. > :59:11.open-minded about whether or not we should buy corporate bonds but I

:59:12. > :59:16.took the view if you were having the kind of impact you wanted on the

:59:17. > :59:19.wider economy, through buying gilts, it was preferable to do it through

:59:20. > :59:26.that because you don't have to get into the issue of RE buying this

:59:27. > :59:32.company or that -- are we buying this part of the company or that? In

:59:33. > :59:40.2009 and 2010, to an extent in 2012, it had a significant impact on the

:59:41. > :59:47.market indirectly through buying gilts. The impact you have by buying

:59:48. > :59:51.gilts is greatest when there are financial dislocations. It was

:59:52. > :59:58.clearly much bigger in 2009 compared to 2012, and I'm sure bigger in

:59:59. > :00:03.2011-12 compared to today. But as I say, my view was always, if you have

:00:04. > :00:07.the impact she wanted through buying gilts, it was preferable to

:00:08. > :00:13.corporate bonds. And for the same reasons are Charles said compared to

:00:14. > :00:17.political economy points? What about the efficacy of it? Partly political

:00:18. > :00:23.economy and I did not feel that nine of us, and the committee, who are

:00:24. > :00:26.not experts on the credit assessment of individual companies, could make

:00:27. > :00:32.a very well-informed decisions about yes, let's buy that but not that. I

:00:33. > :00:36.felt more comfortable, particularly with the scale of purposes, in

:00:37. > :00:40.buying gilts. It comes into the territory of, what is the bank's

:00:41. > :00:45.responsibility and what is the government's? It seems one of the

:00:46. > :00:49.reasons why you had to have such loose monetary policy with interest

:00:50. > :00:56.rates and the QE over recent years is because fiscal policy has been

:00:57. > :01:00.pulling in the other direction with very tight fiscal policy. Do you

:01:01. > :01:04.think they could have been a better balance between fiscal and monetary

:01:05. > :01:10.policy in the last few years, or do you think it has been about right?

:01:11. > :01:15.I'm mindful, the comment you made earlier about, part of the impact of

:01:16. > :01:19.QE has been to keep rates at an incredibly low level and therefore

:01:20. > :01:22.bring forward borrowing. But that is not necessarily happening in terms

:01:23. > :01:32.of government borrowing? It is worth saying the issue here is

:01:33. > :01:36.not just what has happened in the UK, and clearly there are other

:01:37. > :01:43.countries that may have had more fiscal space to exploit than we did,

:01:44. > :01:52.and you can think of country like Germany here. One should certainly

:01:53. > :02:00.recognise, as far as the UK goes, that in 2010, during the depth of

:02:01. > :02:04.the great recession, we had a budget deficit at 10% GDP which was not

:02:05. > :02:07.sustainable. You can debate how you want to close it, but the degree of

:02:08. > :02:14.freedom for manoeuvre on fiscal policy was limited. Now, by virtue

:02:15. > :02:18.of the decisions that have been taken over recent years, the

:02:19. > :02:24.Chancellor potentially has more room to use fiscal policy, should he feel

:02:25. > :02:28.he needs to use it. If you like, that is algebra. The other thing I

:02:29. > :02:34.would say is that fiscal policy is not the answer to everything. You

:02:35. > :02:42.also have structural policies. And potentially, structural policies can

:02:43. > :02:45.affect the amount of saving in the economy and the amount of

:02:46. > :02:51.investment. Again, in different parts of the world, different

:02:52. > :02:59.policies in the atmosphere may have been appropriate. A greater use of

:03:00. > :03:03.those policies mean you can get away with saying it is always monetary

:03:04. > :03:09.policy that has to pick up the ball at the end of the day. Central banks

:03:10. > :03:13.have been the policymaker of last resort around the world which is not

:03:14. > :03:17.a good place for them to be in. I very much agree with you. Professor

:03:18. > :03:24.Miles, do you have any thoughts on this? I think Charlie is right. In

:03:25. > :03:30.2009, fiscal deficit of 10% comedy cannot do that for very long. The

:03:31. > :03:37.stock of debt and net debt to GDP, is getting pretty close to 90%.

:03:38. > :03:42.Having been slightly under 40% before the financial crisis. So, one

:03:43. > :03:47.could describe monetary policy, and people often do, as being tied.

:03:48. > :03:52.Actually, it is allowing the stock of debt to rise enormously compare

:03:53. > :03:58.to GDP. And, we keep pushing back the date, may be very sensibly, at

:03:59. > :04:06.which the government gets back to balance and stop to debt GDP levels.

:04:07. > :04:14.-- stock. I'm reluctant to say that we have been running tight policy.

:04:15. > :04:21.It has certainly been expansive. So there is a difference? Monetary

:04:22. > :04:25.policy has been Lupu expansionary, fiscal policy has allowed an

:04:26. > :04:33.enormous deficit to decline very slowly. -- has been very

:04:34. > :04:42.expansionary. I would not suggest fiscal policy as an alternative, as

:04:43. > :04:46.I explain, my view is by 2007, 2008, it was inevitable. The imbalances

:04:47. > :04:52.that accumulated. One of those is excessive levels of debt. My problem

:04:53. > :04:56.with monetary policy is, since 2009, policy is geared to keep debt levels

:04:57. > :05:01.high or add to them. And expansion would have done the same, or has

:05:02. > :05:06.done. Because, fiscal policy, if you see the composition of debt in the

:05:07. > :05:12.UK, there has been private sector leveraging bird private sector

:05:13. > :05:17.reeler bridging. In that sense, no -- really leveraging. You can make

:05:18. > :05:22.your GDP numbers look better in the short-term but do that with the

:05:23. > :05:30.imbalances that hold the economy in the long term. I would not have

:05:31. > :05:37.suggested that. We have had asset purchasing for a decade. Just last

:05:38. > :05:45.year, we increased it. America has had it for a decade, Japan two. I am

:05:46. > :05:50.interested in why it remains. Is it because the situation is

:05:51. > :06:01.Fraud? And you happen to unwind it? Or is there deep-seated implication

:06:02. > :06:02.in what happens to growth if you unwind those assets gritter might --

:06:03. > :06:15.fraught. What we have referred to, the two or

:06:16. > :06:22.three decade long phenomenon, it automatically means that you run out

:06:23. > :06:29.of room with the short rate sooner. You have less room there. So you

:06:30. > :06:34.have two resort to asset purchases. So, there is the question about at

:06:35. > :06:42.what point you feel sufficiently confident that you can start

:06:43. > :06:50.reversing that. It is fair to say that probably, most MPC members have

:06:51. > :06:57.tended to be somewhat cautious about the point at which you start moving

:06:58. > :07:03.rates back to normal. Because, there is a symmetry. If you move too late,

:07:04. > :07:13.and inflation gets too high, you know how to stop

:07:14. > :07:19.that. On the other hand, if you tighten policy prematurely, and put

:07:20. > :07:24.the economy into a significant tailspin, it is much harder to get

:07:25. > :07:33.out of it. You have to do another big slug of QE or other things.

:07:34. > :07:35.There is an asymmetry which is a consequence of the floor of

:07:36. > :07:42.effective interest rates. If you did not have it, there would be no

:07:43. > :07:47.consequential asymmetry. That is part of the story... Would it not

:07:48. > :07:51.affected, would it go negative? It is a question about the effective

:07:52. > :07:55.rate, one could certainly argue it is counter-productive to go lower

:07:56. > :08:03.than we are. If you go back to 2009, we thought further cuts might well

:08:04. > :08:14.have a negative effect. On activity, rather than the positive effect. I

:08:15. > :08:17.am not confident that going into negative territory, say, which some

:08:18. > :08:22.central bank 's have done, would actually be stimulus in this

:08:23. > :08:27.country. To paraphrase, into the natural rate of interest exists, and

:08:28. > :08:41.rises sufficiently, manipulating the policy rate with asset purchases,

:08:42. > :08:46.they going to the distant horizon? In terms of negative shocks, yes.

:08:47. > :08:55.Was that your explanation of why you thought QE was here forever? Yes.

:08:56. > :09:00.Because I do think that, given the imbalances of the economy, given one

:09:01. > :09:05.of those being the excessive level of debt, it would be difficult to

:09:06. > :09:10.get rates up and policy rates of the ground meaningfully. So, whenever

:09:11. > :09:13.there are disturbances in the economy, as long as monetary

:09:14. > :09:16.policymakers feel that obligation to demand, they will have two resort to

:09:17. > :09:25.more asset purchases. At one point, you would result in basically

:09:26. > :09:30.reducing bank reserves that the same time. It eliminates the bank

:09:31. > :09:37.reserves that created that process of quantitative easing. The banks

:09:38. > :09:41.lose the rocket fuel for their bank and credit, which is a policy

:09:42. > :09:45.tightening. Reducing the balance sheet is the same as tightening

:09:46. > :09:48.policy on the margin. And in my view, it would be very difficult for

:09:49. > :09:58.any of the central banks to do it meaningfully in the coming years. We

:09:59. > :10:03.leave aside the recent experience of the UK with the fall in the value of

:10:04. > :10:11.the Sterling, short-term inflation. If you look at the medium if we are,

:10:12. > :10:16.in till the natural rate of interest rises, here in the UK, we have a

:10:17. > :10:24.policy rate of zero, we cannot do much with that. We are stuck with,

:10:25. > :10:30.therefore, with quantitative easing as the main monetary policy tool.

:10:31. > :10:36.Does that not lead ultimately to changes in perceptions and

:10:37. > :10:41.expectations about inflation? And to lead us into a deflationary cycle?

:10:42. > :10:47.That is a potential worry, yes. I would certainly get very concerned

:10:48. > :10:55.if I saw medium to long-term inflation expectations. Shifting

:10:56. > :11:01.down into negative territory, now fortunately, in this country, we

:11:02. > :11:05.have been around the target, that would not necessarily continue to be

:11:06. > :11:10.so if there was a big and negative disturbance to the economy. Of

:11:11. > :11:17.course, in Japan. Inflation expectations were allowed to get

:11:18. > :11:24.embedded at a low level, which made it much harder for the BOJ to get

:11:25. > :11:33.out of where it is. And, for a time, it looks like the ECB could slip

:11:34. > :11:37.into that. It is a reason that, I believe, if you do find yourself

:11:38. > :11:41.subject to significant adverse shock, there's an argument for

:11:42. > :11:48.taking quite bold expansionary action straightaway, to try and nip

:11:49. > :11:56.it in the bud. Not keeping the ignition drive. -- drive. But that

:11:57. > :12:00.be using fiscal policy? I use other policies, I would like to emphasise

:12:01. > :12:07.that people should not be fixated on fiscal policy as the only other game

:12:08. > :12:16.in town. There are other policies... Such as... A raft of structural

:12:17. > :12:21.policies. Most obviously, this is going outside of the UK, to give you

:12:22. > :12:24.a good example, the most powerful structural policy which can be

:12:25. > :12:32.implemented to boost investment globally would be enhancing the rule

:12:33. > :12:35.of law in many developing countries. That is the one thing that would

:12:36. > :12:40.encourage investment. Firms do not invest if they expect to be

:12:41. > :12:45.expropriated. Things like the design of the tax system, the way that

:12:46. > :12:52.policies operate, there is a whole range of things you might do. The

:12:53. > :12:57.shift in countries away from unfunded pension schemes, too funded

:12:58. > :13:02.pension schemes, is actually something that goes exactly the

:13:03. > :13:07.wrong way in this environment, which is something that is a structural

:13:08. > :13:11.policy. It does not necessarily require physical change. There are a

:13:12. > :13:15.raft of things you can consider, as well as conventional fiscal action,

:13:16. > :13:21.which has a role if you have fiscal space to do it. Some countries have

:13:22. > :13:26.more space than others. Let me bring in Professor Miles. I have left him

:13:27. > :13:28.out today. When you left MPC, one of your parting shots was to say that

:13:29. > :13:35.we should move reasonably quickly to raising the policy. Do you still

:13:36. > :13:39.share that view? I am more optimistic than some discussions,

:13:40. > :13:44.that we are stuck in a trap of QE never being unwound, I am more

:13:45. > :13:49.optimistic than that. The inflationary rate is pretty much at

:13:50. > :13:52.the target now and will go above it. That is partly to do with the

:13:53. > :14:01.exchange rate, you should look through that but my guess is it

:14:02. > :14:05.settles at 2% or slightly north. Unemployment is under 5%. We should

:14:06. > :14:11.not talk about the UK as if we are stuck in depression. I do feel the

:14:12. > :14:16.point at which we can begin the slow march to something more normal, you

:14:17. > :14:22.know, is on the horizon. I think it could well be. I admit, I look at

:14:23. > :14:27.where the yield curve is right now, the markets anticipation and where

:14:28. > :14:31.bank rate might be. I think it is too gloomy, in the sense that what

:14:32. > :14:37.is priced into the market is bank rate is still at half a percent for

:14:38. > :14:39.five years down the road. I think we would be at something more normal by

:14:40. > :14:50.then. That would be? It is a good question

:14:51. > :14:55.as to what is normal, a bank rate used to be 5%. I don't think that is

:14:56. > :15:01.normal. Real interest rates globally keep coming down. My guess is that

:15:02. > :15:07.normal, looking down the road, beyond superexpansion, may be a bank

:15:08. > :15:13.rate nearer to 2.5 or 3. I think interest rates will be nearer that

:15:14. > :15:17.level than where they are now, even four, five years down the road, even

:15:18. > :15:21.though the markets don't see it that way.

:15:22. > :15:27.How will events in America, impact on interest rates? Yeah, I mean

:15:28. > :15:34.that's a really tough one to try to figure out.

:15:35. > :15:38.It depends what happens to the deficit, it depends what happens to

:15:39. > :15:42.the fiscal plans, whether or not Trump will go ahead with the scale

:15:43. > :15:46.of expansion that the rhetoric suggests. I think that's a hard one

:15:47. > :15:54.to try to figure out. I'm sure we will take a look at

:15:55. > :15:59.American effects on the global economy, including ours at other

:16:00. > :16:03.sessions. We should not expand on that now, it is clearly QE with are

:16:04. > :16:14.concentrating on. I have a question on three subjects,

:16:15. > :16:19.the first is to both Professor Miles and thor long-term interlocking with

:16:20. > :16:26.the committee, when it comes to the mown tear policy, is it your

:16:27. > :16:30.observation or not that there is a significant group-thing in

:16:31. > :16:38.Parliament on the policy? In Parliament rather than on the MPC?

:16:39. > :16:44.In Parliament? That's interesting? I have to say, you're committee seems

:16:45. > :16:50.to be a little bit of a sort of counterto that. But there may be

:16:51. > :16:56.questions about whether your representative of the whole of...

:16:57. > :17:06.You should leave the whole job to us don't you think? I take that as a

:17:07. > :17:14.not sure. I ask the question as I know that John McDonald's monitoring

:17:15. > :17:21.fiscal policy is actually identical to Phillip... Sorry, George

:17:22. > :17:29.Osborne's. That strikes me as more than a

:17:30. > :17:38.curiosity in terms of whether there is monetary policy and I throw that

:17:39. > :17:45.out. I find that intriguing? Ne In some sense, I wouldn't have the

:17:46. > :17:51.concern if there is a shared view about how monetary policy operates

:17:52. > :17:55.because I think there is enough consensus about how monetary policy

:17:56. > :18:01.operates in general, in Central Banking, across economists and so

:18:02. > :18:03.forth. We may have different views about precise quantitative

:18:04. > :18:08.magnitudes, and some people will have more concern about the adverse

:18:09. > :18:14.consequences of monetary policy actions, and I'm probably halfway

:18:15. > :18:20.between my colleagues, either side there, so I have certainly share

:18:21. > :18:27.some of Detlev's concerns, probably a bit more relaxed. But these are

:18:28. > :18:33.quantitative differences, rather than a completely different concept.

:18:34. > :18:38.Does it matter whether the bank allows its hollings of QE bonds to

:18:39. > :18:43.expire without selling them back into the market? Is that, what would

:18:44. > :18:48.happen? What would be the consequences if they simply sat on

:18:49. > :18:53.them and did knock? That is fine. I think that is the easiest way to run

:18:54. > :18:57.down the facility. To let the bonds mature and not to replace them.

:18:58. > :19:04.Anything that we should worry about if we do that? Snow No. I think that

:19:05. > :19:08.is again, I say it is unlikely to happen as by the time that these

:19:09. > :19:12.bonds mature, we will have had another crisis and the Bank of

:19:13. > :19:17.England would have bought something else but running them off is not a

:19:18. > :19:22.policy. And there is a chunk in there in the

:19:23. > :19:28.first five years that could make it lumpy? Yes. Yes.

:19:29. > :19:32.I I don't think there need be a problem as long as the monetary

:19:33. > :19:38.policy took the view that the scale of tightening implied by letting the

:19:39. > :19:43.things roll off happened to coincide with the right monetary policy. It

:19:44. > :19:49.would be an unusual situation. You can always move bank rates to adjust

:19:50. > :19:53.it, so that simply letting them roll off, gave you the overall monetary

:19:54. > :19:57.policy. But I don't think it will happen as the Bank of England's

:19:58. > :20:04.balance sheet looking forward would be bigger than it was before.

:20:05. > :20:11.Don't you think there is merit in that? Is it be to get rid of the

:20:12. > :20:16.stock even if you do adjust interest rates? I have to say, I took the

:20:17. > :20:25.view on the committee that I thought the natural time to stop reinvesting

:20:26. > :20:32.was when you decided that you were on a path to raise rates. So you

:20:33. > :20:37.don't wait until you hit 2% before you stop reinvesting. I think I

:20:38. > :20:42.would say let's stop reinvesting when we have the first hike in bank

:20:43. > :20:45.rate as well. Now that wasn't a view that we shared across the rest of

:20:46. > :20:51.the committee. The committee thought it was more Lord Chief Justicically

:20:52. > :20:57.coherent to say that you keep on reinvesting and maturing bonds until

:20:58. > :21:02.say the 2% point at which you might consider sales. But to me, it seemed

:21:03. > :21:09.natural at least to take the advantage of natural run-off when it

:21:10. > :21:17.was safe to do so. It meant you had to sell fewer bonds actively into

:21:18. > :21:23.the market further down the road. My observation of my own constituent

:21:24. > :21:29.sale over the last 16 years is that by far the single biggest stimulus

:21:30. > :21:39.to the local economy, without question, was the unexpected

:21:40. > :21:45.windfall that came, rightly so, morally, and ethically, by former

:21:46. > :21:51.coal miners, who are relatively poor compared to everybody else in the

:21:52. > :22:01.country, suddenly getting a cheque for industrial injury. Further, I

:22:02. > :22:08.noted that those who got the smaller or middle amounts, spent a huge

:22:09. > :22:13.proportion of that in the local economy, those who got bigger

:22:14. > :22:18.amounts would tend rashally to have things like foreign holidays, or

:22:19. > :22:28.even occasionally timeshares if they got that much but that suggests to

:22:29. > :22:35.me that helicopter money was dismissed too readily as a tool that

:22:36. > :22:43.would have had a huge and easy impact and would have also assisted

:22:44. > :22:53.in the debate, that we talked about dislocation, the dislocation of real

:22:54. > :22:57.wages was not mentioned by anybody. Was helicopter money, in your three

:22:58. > :23:02.views, a valid tool, and might it be a valid tool in the future? OK. The

:23:03. > :23:09.first thing to be said about helicopter money. It is equivalent

:23:10. > :23:17.to conventional bond finances fiscal policy, coupled with quantitative

:23:18. > :23:22.easing by the Central Bank where the asset purchases are never reversed.

:23:23. > :23:28.It is helpful to think about it that way as then you focus on the various

:23:29. > :23:35.elements. As far as the fiscal bit goes, which I have no objection to,

:23:36. > :23:39.conventional helicopter money is not necessarily the most sensible way to

:23:40. > :23:45.boost demand. You would expect for a lot of people, if you just give them

:23:46. > :23:51.a lump sum in cache, a lot of it will be saved. If you can focus it

:23:52. > :23:55.on people who might be relatively poor, credit constrained, things

:23:56. > :24:01.like that, they would have a higher propensity to spend, so it would

:24:02. > :24:06.make sense to try to focus any distribution like that and there may

:24:07. > :24:10.be other fiscal actions which make even more sense, investment spending

:24:11. > :24:22.or things like that. But that is properly the domain of you guys, the

:24:23. > :24:27.fiscal policy. The monetary bit of it, a first key point to make is

:24:28. > :24:31.that the expansionary element is not as big as people often think. The

:24:32. > :24:36.reason why people think helicopter money works is basically it is

:24:37. > :24:40.giving people some wealth. It is costless to produce but the money is

:24:41. > :24:45.valuable to people, so they are made better off and they go out and

:24:46. > :24:52.spend. It's very important to remember the bank reserves pay

:24:53. > :24:59.interest, OK? So essentially QE is changing the duration structure of

:25:00. > :25:03.the stakes liabilities. Fewer gilts and more short-term liabilities

:25:04. > :25:07.which are issued by the bank but the bank is having to pay interest on

:25:08. > :25:13.them. So that the net consequence of that in terms of a wealth injection

:25:14. > :25:19.is much smaller than people think. When you come to the question about

:25:20. > :25:23.oh, well this is a permanent monetary expansion, there is a

:25:24. > :25:27.fundamental question about how on earth you make that credible. It can

:25:28. > :25:34.always be reversed further down the road. We can't tie the hands of our

:25:35. > :25:39.successors, you can't tie the hands of future policy makers. They can

:25:40. > :25:44.always undo whatever you do now. So it is incredible to say you are

:25:45. > :25:49.going to make sure that this injection is permanent and it only

:25:50. > :25:54.applies to part of that money stock anyway. So I think it's a mistake to

:25:55. > :26:00.think there's some new policy weapon that hasn't been tried but it is

:26:01. > :26:04.perfectly reasonable to make the argument, that actually, a

:26:05. > :26:09.well-targeted fiscal intervention might well be something that we

:26:10. > :26:13.should consider at this junction. That's the sort of thing that you

:26:14. > :26:16.should have a debate about and indeed you do have debates about.

:26:17. > :26:21.But it is the role of Parliament, not the central bank. It is very

:26:22. > :26:28.important that the central bank just does the monetary bit of this, not

:26:29. > :26:36.the fiscal bit. I think helicopter money is at the

:26:37. > :26:42.extreme end of monetary policy. I am not a fan of helicopter money. But

:26:43. > :26:46.it illustrates the point very well, helicopter money, I think. Is that

:26:47. > :26:52.the interesting thing, if you give everybody in the economy extra

:26:53. > :26:57.money, the more widely you disperse the newly created money from the

:26:58. > :27:02.bank among the population, the smaller the impact will be on the

:27:03. > :27:06.economy. The reason is this, to take your example of the miners in your

:27:07. > :27:10.constituency, the only real benefit that they have is that they have the

:27:11. > :27:15.money and not everybody else in the constituency has as well. If

:27:16. > :27:18.everybody gets ?10,000 in their bank account, or let's assume everybody

:27:19. > :27:25.gets another whatever they have in money, to have another 10% or 15% or

:27:26. > :27:28.20% more than what is in their bank account today, everybody is richer,

:27:29. > :27:34.nobody's relative position has changed. So take an example, a US

:27:35. > :27:39.fund manager gave this example in discussing helicopter money, where

:27:40. > :27:44.he said lelths assume we all get -- 1 billion tomorrow, would that the

:27:45. > :27:49.no mean there would be huge queues outside of the BMW dealership,

:27:50. > :27:55.obviously not. As the person that sells you the BMW in their account,

:27:56. > :28:02.and the people that put together the BMW would be suddenly richer and

:28:03. > :28:12.this whole argument has been discussed in 1741 by David Hume, he

:28:13. > :28:16.who an essay called "Interest" and said assume that we have doubled our

:28:17. > :28:20.money, what would happen to the economy but the answer is nothing

:28:21. > :28:25.with the one exception that the prices would go up as the position

:28:26. > :28:29.of the people in the economy has not changed. Everybody is richer by a

:28:30. > :28:35.certain amount, so the rational thing to do is that everybody that

:28:36. > :28:39.produces something, would charge more for additional services and

:28:40. > :28:44.everybody that consumes, which is also each of us in a capacity, would

:28:45. > :28:50.be willing to pay the higher prices, so I think that it illustrates that

:28:51. > :28:54.the impact of additional money in the economy and what the bank and

:28:55. > :28:58.the central bank does only impacts on growth because you give the money

:28:59. > :29:04.to some and not to others. The money that is printed today and ends up in

:29:05. > :29:08.the banks, the banks give it to the marginal borrower and does the

:29:09. > :29:14.marginal investment project, which would not have been done had the

:29:15. > :29:20.money not been in the economy. So that is what develops the extra

:29:21. > :29:24.activity. If you give everybody the same improvement in nominal money,

:29:25. > :29:25.the only thing that changes is inflation, and no real economic

:29:26. > :29:33.gain. I think secret shall thing about

:29:34. > :29:42.helicopter drops, there's a problem about it, -- the crucial thing. You

:29:43. > :29:47.literally hand-out notes to people from a helicopter and threw them

:29:48. > :29:52.into the economy. Of course, that is not institutionally how it could

:29:53. > :29:56.happen. What would end up happening is the money created by so-called

:29:57. > :30:02.helicopter drops would end up as reserves at the Bank of England, not

:30:03. > :30:11.an expansion in the note issue. People have too find it then. If you

:30:12. > :30:15.think of reserves at the Bank of England, if it continues its current

:30:16. > :30:20.strategy of paying interest on reserves, it is exactly equivalent

:30:21. > :30:23.to the UK Government simply financing government expenditure by

:30:24. > :30:31.issuing new bonds that pay the Bank of England bank rate. It is

:30:32. > :30:35.equivalent. Then, as Charlie said, the idea that this is super

:30:36. > :30:40.expansion and evaporates in front of your eyes, I think it is a mistake

:30:41. > :30:47.for people to think that the notes that might be created are like

:30:48. > :30:53.Milton Friedman 's little banknotes. Widen their take on board your... --

:30:54. > :30:57.why did they not take on board... I have spoken to them many times. I

:30:58. > :31:00.have three more colleagues who would like to come in. It's a longer

:31:01. > :31:04.session than planned and we started a little late but there is a lot of

:31:05. > :31:12.interest. Some of those questions lead neatly on to the debate I

:31:13. > :31:20.wanted to get into, about the distributional impact of QE. In your

:31:21. > :31:23.view, has QE disproportionately benefited wealthy households? Could

:31:24. > :31:30.you say something about the impact of QE, not just about wealth

:31:31. > :31:31.inequality but intergenerational inequality, if you think there's an

:31:32. > :31:43.impact on that? Yeah, I mean, as I said before, it

:31:44. > :31:48.is difficult to disentangle all of the effects of QE, or any monetary

:31:49. > :31:54.policy. I think it is very difficult to subdivide the population, into

:31:55. > :32:01.different buckets and say this group has one, this group has less. We can

:32:02. > :32:06.identify tendencies, and what I would say, I think there's a paper

:32:07. > :32:11.by the Bank of England on this. Yes, it will, on the margin, have

:32:12. > :32:15.benefited people who have financial assets. I think certainly there are

:32:16. > :32:22.those wealthier households. Then, it depends which form you hold assets,

:32:23. > :32:27.and again, most poor or middle-class households hold bank deposits,

:32:28. > :32:33.obviously they would be negatively affected by interest rate policy, in

:32:34. > :32:37.some countries negative rate policy. People who hold equity portfolios

:32:38. > :32:45.will hold lunch oration government securities, which have benefited, --

:32:46. > :32:52.longer duration. They tend to be older citizens. An interesting

:32:53. > :32:54.study, I'm not sure which publication it was, by the Bank of

:32:55. > :33:00.England or someone else, they showed that part of the population aged

:33:01. > :33:03.over 65, they were the only part of the population which sustained

:33:04. > :33:08.positive growth throughout the financial crisis while other age

:33:09. > :33:15.groups had to cut back. Particularly younger people. I think it's another

:33:16. > :33:19.aspect that we know we had what I considered to be an artificial

:33:20. > :33:26.housing group, between 1997 and 2007. There is the widespread idea

:33:27. > :33:32.that house prices stay high, but people who like to enter the housing

:33:33. > :33:36.market look for lower house prices. It was mixed emotions, the Bank of

:33:37. > :33:42.England says, our policy sustains or avoids sharper drops in house prices

:33:43. > :33:45.but there are those who would not like their house price to drop but

:33:46. > :33:51.people who would benefit from it and it comes to the point of, policy

:33:52. > :33:57.will always benefit and disadvantage others. In the market economy, it

:33:58. > :34:01.happens. If consumer tastes change, it will also affect certain

:34:02. > :34:03.industries. If consumer demand shifts, industry 's decline and had

:34:04. > :34:13.to make lay-offs and industries grow. However, it is a disinterested

:34:14. > :34:18.process driven by society at large. And by consumers. Now, you have a

:34:19. > :34:22.government agency like the Bank of England, which has to make these

:34:23. > :34:29.calls. That is a major problem with quantitative easing. I agree with

:34:30. > :34:39.quite a lot Bowe but I would like to add one or two extra bits. -- a lot

:34:40. > :34:40.Bowe. What we should recall is the important underlying reason for

:34:41. > :34:53.lower interest rates is tech -- tectonic forces. It is not just

:34:54. > :35:02.monetary distribution, a significant driver of house prices is driven by

:35:03. > :35:07.these real factors. You have big distributional shifts which would

:35:08. > :35:12.have taken place anyway. At the margin, QE, because it is designed

:35:13. > :35:21.to stimulate through pushing up asset prices, it will benefit the

:35:22. > :35:26.asset rich. To the cost of those who do not have it but want to acquire

:35:27. > :35:32.them. In that sense, there is an intergenerational angle. However,

:35:33. > :35:38.the complicating factor, because it has indirect effects on the level of

:35:39. > :35:42.activity, those who are disadvantaged because of the asset

:35:43. > :35:47.price movement, younger people, they are more likely to be in work now.

:35:48. > :35:50.They may have higher wages and so forth. So, this is something which

:35:51. > :35:59.goes in the other direction. The net effect, on them, it's not clear

:36:00. > :36:01.which way it goes. It would be different for different individuals

:36:02. > :36:07.and different stages of their life cycle. And so forth. What about

:36:08. > :36:14.thinking about the long-term impacts on younger people? You mentioned

:36:15. > :36:17.potential impact on wages and so on. In the long-term, one of the

:36:18. > :36:22.consequences of where we find ourselves at the moment is the

:36:23. > :36:27.working age population has to pay a great deal towards the retired

:36:28. > :36:31.population to maintain pension costs, particularly because of

:36:32. > :36:35.defined benefits, which, by definition, are defined in spite of

:36:36. > :36:38.what else is going on in the economy. And longer term, in terms

:36:39. > :36:43.of investment in pensions, for example, it may be this younger

:36:44. > :36:46.generation not only pay for their predecessors but pay more for a

:36:47. > :36:51.lower value pension in the longer term. There is a longer term impact

:36:52. > :36:57.in terms of the impact on people who are currently young, compared to the

:36:58. > :37:02.elderly population, the retired population? There are certainly

:37:03. > :37:07.lasting effects. These big, intergenerational shifts, I think,

:37:08. > :37:12.are one of the big stories in the last ten or 20 years. Monetary

:37:13. > :37:18.policy is a marginal player in this, compared to big and deeper tectonic

:37:19. > :37:23.forces. It also increases longevity, that plays in there as well. But, of

:37:24. > :37:27.course, this is territory which is very much the territorial of

:37:28. > :37:33.Parliament, and fiscal authorities. Not the central bank for Stott we

:37:34. > :37:35.will come back to that. The intergenerational things are

:37:36. > :37:45.formidably difficult to work out. I'm not even sure the direction it

:37:46. > :37:49.goes in. If you were about to buy a in unity, it comes down partly

:37:50. > :37:56.because of QE and longer term trends as well, you are worse off. A

:37:57. > :38:00.30-year-old taking out a mortgage to buy your first property, you may

:38:01. > :38:04.find the interest rate you get on a five-year fixed rate mortgage is

:38:05. > :38:11.lower because the Bank of England has managed to push five-year guilt

:38:12. > :38:15.lower. It's interesting to see where intergenerational stuff is. Some

:38:16. > :38:20.young will be worse off than the old. The net impact I think is

:38:21. > :38:25.formidably difficult to work out and is just not obvious, to me anyway,

:38:26. > :38:28.that it is clear, OK, all the better off, younger worse off. I don't

:38:29. > :38:42.think it is like that. -- old are better off. Before Steve comes in...

:38:43. > :38:51.Sir Charles, you made the point quite rightly that there are many

:38:52. > :38:55.things the government could do through fiscal policy, to mitigate

:38:56. > :38:59.some of the consequences of what he described as the marginal impact of

:39:00. > :39:04.monetary policy on wealth and income and equality, and intergenerational

:39:05. > :39:10.equality. I am serious to hear the views of all of you, before handing

:39:11. > :39:15.you back to the chair, is this solely something that should be...

:39:16. > :39:18.Should this issue be solely the preserve of fiscal policy? Or are

:39:19. > :39:23.there appropriate monetary policy responses which should be considered

:39:24. > :39:31.in terms of mitigating against equality? It is not obvious what you

:39:32. > :39:34.have in mind, if they are monetary instruments they probably operate

:39:35. > :39:40.pretty indirectly so they would not be well targeted but I would be very

:39:41. > :39:49.worried about pulling the central bank into having obligations to

:39:50. > :39:52.worry about distributional consequences, or to be given

:39:53. > :40:02.distributional mandate. That really is territory for politicians and

:40:03. > :40:08.Parliament. To decide. We have already seen a degree of mission

:40:09. > :40:11.creep. Happening with Central Bank. Central banks themselves do not want

:40:12. > :40:17.it, they are pulled towards this territory which is generally that

:40:18. > :40:27.which should be inhabited by political actors. And, going the

:40:28. > :40:30.step of actually giving the MPC specific distributional elements to

:40:31. > :40:36.monetary policy remits, I think it would be extremely dangerous

:40:37. > :40:38.territory. If you are concerned about the distributional

:40:39. > :40:43.consequences, I think the right response is for Parliament to decide

:40:44. > :40:46.to do things that are appropriate and address them. If it requires

:40:47. > :40:54.doing something in conjunction with the bank, it can be set up, and the

:40:55. > :41:00.bank acts as a Treasury agent, and so forth. But it should not really

:41:01. > :41:09.be bank executives, the MPC, actively taking decisions to have

:41:10. > :41:22.specific distributional effects. That is my view. It's a complicated

:41:23. > :41:30.topic, I do not think might policy should be dragged into the equality

:41:31. > :41:37.debate. And again, it's already doing way too much. My general view

:41:38. > :41:42.is functioning market economies, they will be the best... It is the

:41:43. > :41:47.best tool for the standard of living to rise through our society. Does it

:41:48. > :41:51.mean you quality? Obviously not, a market economy will not... We know

:41:52. > :41:56.that the outcome will not be equal. Is there reason to believe there

:41:57. > :42:00.will be rising inequality? I do not see that, I don't think that leads

:42:01. > :42:06.to a constant widening of an economy. Quite the opposite. I think

:42:07. > :42:11.one of the phenomena of capitalism is the middle-class, they did not

:42:12. > :42:17.exist in pre-capital Times. If you see this globally, now that the

:42:18. > :42:24.world economy has opened up more, over the last 40 or 50 years, on a

:42:25. > :42:31.global scale, inequality has declined. So, I do not think...

:42:32. > :42:34.Fiscal policy or monetary policy is geared towards giving us a

:42:35. > :42:41.functional market economy. I don't think we have this problem to begin

:42:42. > :42:47.with. Professor Miles? I tend to agree with Charlie. It is

:42:48. > :42:50.problematic to tell the Bank of England that, as well as having an

:42:51. > :42:56.inflation target and financial stability and a limited range of

:42:57. > :43:03.tools, you also have an inequality of more wealth targets to try and

:43:04. > :43:07.hit as well. I think it would be true, even if that would be

:43:08. > :43:10.problematic and even if you could reliably work out what the

:43:11. > :43:16.distributional impact among policy would be. There is also an issue, as

:43:17. > :43:21.I mentioned earlier, I think it is far from obvious what they generally

:43:22. > :43:27.are, those distributional factors. Steve Baker had a question to ask...

:43:28. > :43:31.Be quick. On this very point about it being practically impossible to

:43:32. > :43:34.work out distributional impacts, it points to the problems with what Sir

:43:35. > :43:38.Charles indicated, where the government is, it should do

:43:39. > :43:43.something to address the injustice of redistribution that we aren't

:43:44. > :43:47.sure works. Does it indicate the categorically different kinds of

:43:48. > :43:50.society? The market economy, where distributional 12 and income depends

:43:51. > :43:56.on your ability to adjust what you do, to best meet the needs of other

:43:57. > :43:59.people? As entrepreneurs do. Against a society where there is a very high

:44:00. > :44:04.degree to which your wealth and income is determined by unknown

:44:05. > :44:09.consequences of decisions by authority, I am just putting it to

:44:10. > :44:10.you. Isn't it categorically different kind of society to market

:44:11. > :44:24.society? I gave a lecture on this to the

:44:25. > :44:29.first years LSE last week. I think you are right, but there is no

:44:30. > :44:34.guarantee that the distribution of income, that comes out of a well

:44:35. > :44:40.functioning market economy, as debt left said is one that we find

:44:41. > :44:47.socially acceptable. -- Detlev. The final you do find it acceptable, the

:44:48. > :44:50.best way to deal with that is through redistributed taxation

:44:51. > :44:56.rather than direct intervention in market economy. We are going to move

:44:57. > :45:00.on. We are going to stay in the same field. I want to ask one question

:45:01. > :45:08.about low interest rates first, I am not going to go down the theoretical

:45:09. > :45:12.line Steve went down, but to ask a practical question, we can all

:45:13. > :45:18.understand and imagine if we cut interest rates from 8% to 5%, then

:45:19. > :45:22.all sorts of investment projects round the economy become economic,

:45:23. > :45:26.and so people borrow some money from the bank and go ahead and the

:45:27. > :45:31.economy whizzes off. But do you really think that cutting interest

:45:32. > :45:35.rates from a half percent to a quarter percent is going to have a

:45:36. > :45:39.significant impact on the number of investment projects that are

:45:40. > :45:48.profitable? I will go to Professor miles first, because he is laughing.

:45:49. > :45:55.No. What was the point of doing it? It may have some small effect at the

:45:56. > :46:00.margin but I don't take the view that the policy package that was

:46:01. > :46:04.announced after the referendum, including the other elements as

:46:05. > :46:10.well, is likely to have had that powerful in effect on the economy.

:46:11. > :46:16.And do you think there have become some level below which, in fact, to

:46:17. > :46:22.say that the lower, the policy lower band isn't naught it is one... In it

:46:23. > :46:28.would be 2009 we took the view the effective lower bound was a that,

:46:29. > :46:32.everyone though in principle decould have gone lower, we thought going

:46:33. > :46:43.low would have been counter productive. I would agree with you,

:46:44. > :46:47.that rate cuts, in the territory we are in rates a solo already, the

:46:48. > :46:57.degree of fraction you get from them is probably pretty low. Good. Fine.

:46:58. > :47:02.I wand to come back to this... I can just ask if these measures Deedn't

:47:03. > :47:07.have much impact on the economy, -- didn't. The Governor must be wrong

:47:08. > :47:12.when he tells us the reason everything is going swimmingly is

:47:13. > :47:15.because there was a stitch in time to save fine, he took the requisite

:47:16. > :47:22.measures that kept the economy on course. My personal view is that may

:47:23. > :47:28.have had a marginal element but I don't think it is the primary reason

:47:29. > :47:31.why growth has surprised us for the up side, in the second half of last

:47:32. > :47:37.year, and I don't want toe say any more than that if you don't mind,

:47:38. > :47:42.for reasons that you understand. Well, you have been so helpful to us

:47:43. > :47:50.so far, and we want more material from you after this, so I suppose we

:47:51. > :47:58.will have to settle for that. Can I suggest I reappear in front of you

:47:59. > :48:04.in two weeks' time? Yes. I think my colleagues are getting bored of me

:48:05. > :48:15.Haye hearing me say this. The Bank of England published a paper in 2012

:48:16. > :48:22.which that the westiest 5% of households gained ?185,000. Which is

:48:23. > :48:27.annance chute o fortune by most people's standards. So my first

:48:28. > :48:30.question is do you think we show ask the bank to update that piece of

:48:31. > :48:39.work because that is five years ago, do you think that would be a good

:48:40. > :48:44.idea. Remember that is the marginal effect of QE. What do you mean? The

:48:45. > :48:53.effect of QE, if you think about what has happened to wealth, those

:48:54. > :49:00.people took a big hit to their wealth. So... So it was right for

:49:01. > :49:08.the bank to restore it to them? No, no, no, when you put it in isolation

:49:09. > :49:14.it makes it sound like, those people have done very well. You want to set

:49:15. > :49:19.it against the fact that those people got hit and basically well

:49:20. > :49:25.and income in equality hasn't changed hugely. We were told that by

:49:26. > :49:31.the new deputy governor. Sorry Sir Charles, that is not true either.

:49:32. > :49:34.Income inequality has fallen since 2007 but wealth inequality has

:49:35. > :49:42.increased. This is obviously part of it, even if it is not the may jor

:49:43. > :49:50.part of ultra. So when you say you think it is wrong, to give the bank

:49:51. > :49:58.some kind of target, or aspiration, on the distribution, why is it wrong

:49:59. > :50:04.for them to be concerns to make the world less than equal but absolutely

:50:05. > :50:12.fine to make the world more unequal. Let us be clear, the bank did not

:50:13. > :50:23.undertake QE with the ones. I of course I understand that. Of course

:50:24. > :50:31.I understand that. What I said earlier this afternoon was I think

:50:32. > :50:35.it would be you are going down a very slippery slope if you are going

:50:36. > :50:44.to delegate decisions over distribution, direct saying we are

:50:45. > :50:52.giving you an objective to try and achieve, to the MPC or the Bank of

:50:53. > :51:03.England. I think a much better way to approach this, to say if there

:51:04. > :51:07.are distribution alibi products of monetary policy actions then

:51:08. > :51:17.Parliament should appropriate off setting. We have heard from that the

:51:18. > :51:21.bank as well. It is my view. It is not really in in the realm of the

:51:22. > :51:27.politically feasible as I am sure you know. No Chancellor of the

:51:28. > :51:31.Exchequer is going to stand up and announce a tax rise, on capital. We

:51:32. > :51:38.don't have any capital taxes at the moment. No Chancellor is going to

:51:39. > :51:43.stand up in the chamber and announce a tax rise on capital of 185,000 for

:51:44. > :51:51.the wealthiest people, is he. He will have -- we will have tinkering

:51:52. > :51:59.at the edges. Sorry, look... Do you think that is a likely up shot in

:52:00. > :52:08.Well, as I say, if you are concerned about the implications, there have

:52:09. > :52:13.been huge wealth consequences, which swamp the QE impact as a result of

:52:14. > :52:21.this decline in global real interest rates. Huge intergenerational

:52:22. > :52:25.distributional shift, a lot of it intermediatiated through the housing

:52:26. > :52:29.market. I know that. I understand that I agree that the housing market

:52:30. > :52:37.is not in a good state in this country but we are having an inquiry

:52:38. > :52:40.about QE. One of the drawbacks of QE is the impact of dresh distribution.

:52:41. > :52:47.People in the Bank of England and the top five percent of the

:52:48. > :52:53.population may not think it is a lot of money, but my constituents do

:52:54. > :53:02.think it is. So I want to consider whether there is a way that the bank

:53:03. > :53:06.could do the QE that wouldn't have such serious distributional impacts,

:53:07. > :53:14.do you think that there might be. I think the answer to that is probably

:53:15. > :53:20.no, just that the nature of the way QE operates, I don't think can avoid

:53:21. > :53:25.those distributional... I should say I am concerned about the

:53:26. > :53:31.consequence, but I think the right way out is to get the situation into

:53:32. > :53:38.a situation where you don't have to rely on QE and rely on short-term

:53:39. > :53:46.measures, so that is the ideal, as we said earlier, you know, we leaked

:53:47. > :53:53.on QE as an emergency, so this is not somewhere we want to be. I don't

:53:54. > :54:01.think there is a version of QE which can have the effect you want it to

:54:02. > :54:04.have on the general level of demand. Just acoids distributional by

:54:05. > :54:10.products, I think. You may been able to design it in a way that

:54:11. > :54:16.attenuates some of them with a different mix, but it will be a

:54:17. > :54:26.second order. That is what I was going to ask you about. Because the

:54:27. > :54:32.ECB, by different assessed -- -- assets from the Bank of England,

:54:33. > :54:37.they have been die -- buying infrastructure from banks in

:54:38. > :54:46.Germany, France, and they have also got a strand of, which goings

:54:47. > :54:50.towards banks that support SMEs. So I was wondering if, rather than this

:54:51. > :54:57.scatter gun approach, which the bank has, if we had a more drefrkted

:54:58. > :55:03.approach, it it might have different distributional impacts. The first

:55:04. > :55:08.thing to be said is there will be general price, everyone Ferez the

:55:09. > :55:17.asset purchases which are focussed on different, the way QE works is it

:55:18. > :55:24.ripplings out. I have no objection at all, to buying other assets but

:55:25. > :55:29.it should be a decision for the Treasury with the bank acting as its

:55:30. > :55:36.agent. I think that is completely sensible and reasonable. The bank

:55:37. > :55:39.could say we are interested in investing in these things and we

:55:40. > :55:47.think the implications would be better so do it in this way. That...

:55:48. > :55:57.I am happy with that, I do don't see any problem. What I see a problem is

:55:58. > :56:04.the bank doing it off its own back. It seemed what QE did at its most

:56:05. > :56:10.effectives, the first 200 pound in quilt purchases, it tried to bring

:56:11. > :56:14.the bright of a range of equity, corporate bonds, back to where they

:56:15. > :56:17.might have been or closer to where they might have been without the

:56:18. > :56:26.financial crash, so it happens, there is a collapse in equity

:56:27. > :56:33.prices, corporate bond yours goes through the... The first big slug of

:56:34. > :56:38.QE tries to bring the prices back up closes to where they might have

:56:39. > :56:46.been, that collapse in those values wasn't helping anybody. If you look

:56:47. > :56:54.at the action you might in isolation say this just helped rich people.

:56:55. > :56:58.What it was doing was trying to off set imperfectly and only to some

:56:59. > :57:06.extent, an enormous loss having a damaging effect on the economy. So

:57:07. > :57:13.it wasn't here is an action which has retributed wealth to the better

:57:14. > :57:18.off. There is things like anew is lead because gilts had fallen in

:57:19. > :57:24.yield off the crisis partly as a result of asset purchases, make

:57:25. > :57:30.people who have a big pot of money worse off, I think the

:57:31. > :57:37.wealthinequality is murky and not as clear-cut as some would suggest. I

:57:38. > :57:43.thought the 2012 report from the bank didn't quite bring this out in

:57:44. > :57:45.a way it should. People jump on this 185,000 number I think is

:57:46. > :57:51.misleading. But don't you think there is a

:57:52. > :57:58.difference between undertaking a programme of QE in a crisis, and

:57:59. > :58:03.discoring it has this effect and carrying on with it in the knowledge

:58:04. > :58:12.that it tends to have these effects and we are not, the economy is not

:58:13. > :58:17.going at one would wish. That would be a false description. I think the

:58:18. > :58:20.impacts of the they set purchase after that first round have been

:58:21. > :58:24.smallerment whatever you think about these issues I think they are much

:58:25. > :58:32.less significant after that first period. Than in that period.

:58:33. > :58:38.Secondly, I remain of the view that it is very difficult to be clear on

:58:39. > :58:44.what the distributional impacts of low interest rates is. I am going to

:58:45. > :58:49.move the questioning on to Jacob, before I do, I want to ask Charles

:58:50. > :58:51.one question that is related to #134g you have done a bit of work

:58:52. > :59:07.on. You a list of these gave pressures

:59:08. > :59:11.before Kuwait. I have noted them down roughly. The question I want to

:59:12. > :59:13.ask about them is to the extent to which they are going to bottom out.

:59:14. > :59:27.-- before QE. I am looking at them now. You said

:59:28. > :59:32.China, the move away from physical to a knowledge based capital, slow

:59:33. > :59:39.population growth might carry them downwards. Safe assets, there must

:59:40. > :59:44.be a limit to that. These things will carry on at the same rate and

:59:45. > :59:51.so on. Can I ask you to comment on that? Some of those forces are going

:59:52. > :59:59.to potentially continue. This shift in the nature of production, away

:00:00. > :00:07.from physical towards knowledge-based, Internet, and all

:00:08. > :00:12.of that stuff, would be one example. There are a couple of particular

:00:13. > :00:20.things that you might think might reverse. Firstly, headwinds from the

:00:21. > :00:28.financial crisis should be abating. We talked about this earlier, about

:00:29. > :00:32.how quickly they abate. There is a particular aspect which is

:00:33. > :00:37.reversing. A lot of people are focused on increased longevity that

:00:38. > :00:43.hasn't been matched by higher retirement ages. Which means you

:00:44. > :00:47.have to save more to cover your retirement years. But there is

:00:48. > :00:53.another factor, which is potentially important, which hasn't had so much

:00:54. > :00:56.attention, which is the relative size of different age groups.

:00:57. > :01:01.Broadly speaking, the young spend what they get, the middle-aged safer

:01:02. > :01:08.their retirement, and the old do not save. I'm talking locally, not

:01:09. > :01:14.particularly in the UK, it is pronounced in China, as well as some

:01:15. > :01:19.other countries. We had a bolt of the middle-aged, the 40 to 65 age

:01:20. > :01:29.group, which will be doing a lot of asset accumulation ahead of their

:01:30. > :01:32.retirement. -- bulge. Over the last 20 years the difference between the

:01:33. > :01:36.population share of the middle-aged to the old has been going up. We've

:01:37. > :01:43.just reached the point where that has peaked. And it is now going into

:01:44. > :01:56.reverse as people are passing the bulge baby boom -- the bulge off

:01:57. > :02:03.baby-boom generation that is. The US fiscal policy, David said he thought

:02:04. > :02:07.it was unclear. I would expect that also to be putting some upward

:02:08. > :02:14.pressure on local interest rates, as well. There are reasons for

:02:15. > :02:18.expecting some recovery in the underlying natural real rate of

:02:19. > :02:22.interest going forward. It may be relatively slow. I'm not saying it

:02:23. > :02:26.will bounce back up in the next two, three years, but this graphic force

:02:27. > :02:29.that I talked about will be something that will be kicking in

:02:30. > :02:36.ever more strongly over the next decade. That's helpful. Thank you.

:02:37. > :02:39.Jacob, respond. As we are coming to the end of the

:02:40. > :02:44.session it is time to talk about zombies.

:02:45. > :02:49.CHUCKLES There may be some merging in

:02:50. > :02:55.Westminster. Particularly a report on the OECD on zombie companies. The

:02:56. > :03:03.affect low interest rates had on productivity. This allocation of

:03:04. > :03:07.capital is having its own effects. To broaden it out, for example

:03:08. > :03:13.zombie companies, low rates, leading to this having a more negative than

:03:14. > :03:19.positive effect. I would just like to get the views of the panel on

:03:20. > :03:25.that. Yes, there is potentially an element. One of the argument about

:03:26. > :03:30.productivity growth, and why it has been low in this country, since the

:03:31. > :03:37.crisis is in part of the creative destruction. And also when the

:03:38. > :03:43.banking system is impaired. Because banks are reluctant to declare loans

:03:44. > :03:49.that have gone bad because they need enough to repair their balance sheet

:03:50. > :03:58.and so forth. There is an element of that. It is difficult to know how

:03:59. > :04:02.big it is. The key thing during the depths of the downturn is that you

:04:03. > :04:09.don't want to end up killing companies that have a perfectly

:04:10. > :04:15.viable solution. Getting the timing right of any exit is important. I

:04:16. > :04:19.think it is almost certainly the case that there will be some

:04:20. > :04:22.businesses who went interest rates start to rise will find their

:04:23. > :04:28.business models are no longer viable. And capital will be

:04:29. > :04:38.reallocated. Isn't your point that you don't want to destroy viable

:04:39. > :04:41.businesses. Indeed, yes. And continuing these very low interest

:04:42. > :04:48.rate is just extending and delaying the solution of the problem. You

:04:49. > :04:52.said that banks lend to the marginal borrower. The idea that it wouldn't

:04:53. > :04:58.happen if money wasn't going through the banking system. But they still

:04:59. > :05:04.have their money tied up with companies that are good, they don't

:05:05. > :05:09.have the money to lend to that marginal new company, so you delay,

:05:10. > :05:15.is that right, is that too simplistic? That is absolutely

:05:16. > :05:20.correct. To pick up on the phrase Giles used, creative destruction,

:05:21. > :05:24.without destruction there is no creation. You need companies to fall

:05:25. > :05:31.by the wayside. Bankruptcy is part of capitalism as death is part of

:05:32. > :05:40.life. You need to make room for new companies. Part of the general term

:05:41. > :05:46.stimulus policies in the crisis... The crisis, or the recession, also

:05:47. > :05:51.has a cleansing effect. We shouldn't engineer a crisis in order to

:05:52. > :05:56.cleanse. But clearly the recession's response was to a boom which went

:05:57. > :06:01.too far. And stopping the forces of the recession in this cleansing,

:06:02. > :06:04.liquidation process. By definition that must mean that you keep

:06:05. > :06:08.businesses through the recession that should have been weeded out,

:06:09. > :06:14.and should have gone by the wayside. If I can push further. It seems to

:06:15. > :06:18.me that the time quantitative easing started it was the right thing to

:06:19. > :06:22.do. The response to a credit crunch was to make sure money was as

:06:23. > :06:27.available as possible. And we didn't crunch everybody at once. Now people

:06:28. > :06:31.have superlow interest rates for a long period. They've had every

:06:32. > :06:40.opportunity to readjust their affairs, to meet a new reality, and

:06:41. > :06:43.the failure to begin to raise the interest rates is simply delaying

:06:44. > :06:51.any possibility of proper recovery. It has gone beyond the point of it

:06:52. > :06:55.helping and it is now harming. I fully agree. I think part of the

:06:56. > :06:59.problem here is the objective of quantitative easing has shifted.

:07:00. > :07:05.Maybe not so much in the Bank of England. There might be better

:07:06. > :07:11.judges of that. But if you look at the US, the first quantitative

:07:12. > :07:16.easing of the Lehman Brothers collapse was trying to avoid a

:07:17. > :07:19.seizing up of the interbank market. The objective was to take assets

:07:20. > :07:25.from the balance sheets onto the central bank. We placed those with

:07:26. > :07:30.bank reserves. Over supplying the system. So they would not rely on

:07:31. > :07:35.lending excess reserves to each other. And therefore keep banks from

:07:36. > :07:40.collapsing. But then very quickly, certainly by 2010, this new policy

:07:41. > :07:42.objective had changed to one of using quantitative easing to

:07:43. > :07:52.stimulate the economy, to further help it grow. That is unhealthy. You

:07:53. > :07:56.were both hinting at this in your concerns over production rates from

:07:57. > :08:03.half a percent accord of a percent. We actually need our banks to be

:08:04. > :08:07.making money. -- half a percent to a quarter of a percent. We need to

:08:08. > :08:10.give it to companies that need it. But at a quarter of a percent, and

:08:11. > :08:18.in some countries negative interest rates, the bank margins are so low

:08:19. > :08:21.that it is difficult for them to recover from their past mistakes. It

:08:22. > :08:29.is difficult for them to acknowledge genuine bad debts. We want to keep

:08:30. > :08:31.them going. And it is very hard for them to attract deposits because why

:08:32. > :08:37.on earth would you deposit your money with a bank? This is all

:08:38. > :08:41.having a perverse effect. It is damaging the banking system rather

:08:42. > :08:45.than helping it. Whereas before it was essential in helping. I have

:08:46. > :08:55.sympathy with that. I said some time ago. When I left the committee I

:08:56. > :08:59.thought that the time is approaching, the economy was getting

:09:00. > :09:02.back to something of a normal level of operation. The economy is

:09:03. > :09:09.roundabout what we thought was the natural rate of employment and

:09:10. > :09:14.inflation. The exchange rate depreciation and things in the short

:09:15. > :09:24.term you must consider, as well. But that looks reasonably OK. You would

:09:25. > :09:28.be thinking that now is the time to move some of the extraordinary money

:09:29. > :09:38.stimulus. That was hinted at with the formal guidance in 2014. I don't

:09:39. > :09:42.know what you think, Miles, but that seemed the right point to start

:09:43. > :09:47.normalising. I very much agree with you that having interest rates at

:09:48. > :09:51.extremely low levels, and certainly negative interest rates come as

:09:52. > :09:55.something to be avoided. Negative rate in the UK would be extremely

:09:56. > :10:03.unhelpful. I cannot see any strong arguments for doing that at all. I

:10:04. > :10:11.think also that the last time we can spend with interest rates as they

:10:12. > :10:15.are at the moment the better. -- the less. My view is that we are much

:10:16. > :10:23.nearer to that point, that welcome point, where we can start, and I

:10:24. > :10:31.hope we start it pretty soon. How would you start it if it were up to

:10:32. > :10:37.you? So that you don't... You wouldn't put interest rates up,

:10:38. > :10:47.would you? No. What pathway would you follow? Certainly this is

:10:48. > :10:51.something that we talked about collectively as a committee. We were

:10:52. > :10:54.very aware that when the time did come to start tightening policy, you

:10:55. > :11:02.need to communicate pretty carefully. So that you don't get

:11:03. > :11:06.over reaction by the markets. My general approach, in part because we

:11:07. > :11:11.don't know what the impact is going to be after such a long period of

:11:12. > :11:15.very low rates, that you probably want to do it very slowly if you

:11:16. > :11:20.can. Which in itself tells you, start early, you've got increased by

:11:21. > :11:30.a certain amount, start early, go slowly. Start early, the gradual,

:11:31. > :11:36.and stress that this is not about needs... Quite the opposite. Do all

:11:37. > :11:41.three of you agree, or would this be taking it too far, that quantitative

:11:42. > :11:44.easing is now past the point at which it is beneficial, and keeping

:11:45. > :11:51.it going beyond that point becomes actually more harmful than not

:11:52. > :11:55.lowering interest rates? I think it has been harmful all along. I could

:11:56. > :12:04.see in the depth of the crisis, I mean, given the institution of the

:12:05. > :12:11.central bank, part of the Institute has led to this perverse effect. We

:12:12. > :12:15.encourage banks to take more risk. We tell the public that their banks

:12:16. > :12:20.are safe because there is a backing from the central bank. In a way that

:12:21. > :12:28.is a key violation of the principles of a market economy. In that sense

:12:29. > :12:33.it would be against any bank. But that was the institutional

:12:34. > :12:37.arrangement. I think that the depth of the crisis it probably would have

:12:38. > :12:42.been the wrong moment to remove the safety net. Ultimately the safety

:12:43. > :12:47.net will have to be removed. We have to come to a point where we move the

:12:48. > :12:53.central bank. That is my view, it is a radical view, as a last resort.

:12:54. > :12:57.Because it isn't compatible with a functioning market. You decent the

:12:58. > :12:59.FAI 's extra credit creation, which leads to all the problems we

:13:00. > :13:11.discussed here. -- Eugene the impact of quantitative easing is

:13:12. > :13:22.clearly diminishing very rapidly. That is certainly happening. If you

:13:23. > :13:26.would put me on the board of the ECB I would probably think the best

:13:27. > :13:29.course would be just not to do anything and basically... Because I

:13:30. > :13:34.think raising interest rates, quite frankly, as we live in an over

:13:35. > :13:37.lavished economy, where the rate of interest is so low, would be a

:13:38. > :13:42.dangerous policy. I think it would be trite. Then it would kick off

:13:43. > :13:48.another recession. By which point we go to even more of an aggressive

:13:49. > :13:52.policy. The one thing you can clearly ascertain here, where all of

:13:53. > :14:06.these economies are now, we at the point where expenditure...

:14:07. > :14:14.So the position the central bank is in is a dangerous one. They want to

:14:15. > :14:19.move back from this policy for all of the distortions. Distribution of

:14:20. > :14:23.income and wealth. Everybody is uncomfortable. But it is difficult

:14:24. > :14:28.to move away because as long as we haven't allowed the imbalances to

:14:29. > :14:32.clear out, which would probably require an even worse recession in a

:14:33. > :14:36.way, politically that isn't wanted to that puts the central bank under

:14:37. > :14:42.an extraordinarily difficult position. The best thing to do is to

:14:43. > :14:45.tell the market and the system that this is basically it. Here is the

:14:46. > :14:49.level of bank reserves we have, which is plenty, it'll last for the

:14:50. > :14:55.next 50 years, and we are not going to do anything. And banks will pay

:14:56. > :15:00.for it. We are not setting up interest policy, this is it, you

:15:01. > :15:01.know, we become passive. To me that would potentially be the best

:15:02. > :15:11.outcome. Maybe we have a year of minus one or

:15:12. > :15:17.plus one, plus two, I don't know, we will see. But, I think ultimately

:15:18. > :15:24.there would be a better outcome than trying to again and again, try to

:15:25. > :15:30.use monetary policy means to get the economy growing at a rate which it

:15:31. > :15:36.does not sustain. I certainly think the marginal benefit of a given

:15:37. > :15:43.quantum, of asset purchase is less now than it was in the depths of the

:15:44. > :15:51.crisis, for the reason we talked about earlier on, I think the costs,

:15:52. > :15:56.in some of these unwanted side effect, the distributional

:15:57. > :16:01.consequences have come more to the fore, their calculus is much more

:16:02. > :16:07.favourable, which is why if stimulus is required we ought to be looking

:16:08. > :16:17.in other directions. Fiscal rather than monetary. I agree with you on

:16:18. > :16:27.structural. Structural. Passive bank. Passive policy. With the

:16:28. > :16:34.reserve, the reserves actually I am, I wouldn't be worried about them

:16:35. > :16:38.gradually being shrunk, I think the banks have excess is ever --

:16:39. > :16:44.reserve, I don't think it's a direct linkage. It is the size of their

:16:45. > :16:51.balance sheets at the moment. Professor miles? Believe the impact

:16:52. > :16:56.of changing the stock is lower than it was. I think partly because of

:16:57. > :17:01.that, I don't think there is any reason to feel a a the great urgency

:17:02. > :17:07.in bringing the stock down, just because I think the marginal impacts

:17:08. > :17:15.one way or another are just that, rather marginal. We get no

:17:16. > :17:24.impression the MPCC is thinking along these lines. Is this because

:17:25. > :17:28.if you are on the MPCC, you have got to own propaganda, is it because

:17:29. > :17:34.they have group think, do you have any insight or is this an unfair

:17:35. > :17:38.question and how could you possibly know now you have left it. I don't

:17:39. > :17:43.know what the views are on the committee. It is difficult for a

:17:44. > :17:48.central bank to say we are totally powerless. Well, no, because the

:17:49. > :17:55.adverse effect on confidence of doing that. You know, there is an

:17:56. > :18:03.element of bluff and confidence in this, and even if you think the

:18:04. > :18:08.policy action might itself not have that much traction, doing that at

:18:09. > :18:12.key moments maybe quite important at reinforcing confidence and we

:18:13. > :18:21.discussed what happened in early 2009. The mere fact of the action, I

:18:22. > :18:24.think, added something over and above the technical aspects of the

:18:25. > :18:29.monetary interhavion. -- intervention. So I think that is

:18:30. > :18:35.part of the story. I wouldn't go so far as the to say the bank is out of

:18:36. > :18:40.ammunition, but they are in a much less favourably placed situation

:18:41. > :18:45.than we were in 2009, when we were just embarking on QE. So they are

:18:46. > :18:50.more boxed in. We have ranged, you want to add

:18:51. > :18:54.something in we have had a very interesting session, ranged, you

:18:55. > :19:00.wanted to come in, didn't you. I am very sorry, you had a quick

:19:01. > :19:06.question. I want to press you more on helicopter money. There is is a

:19:07. > :19:11.bit of evidence that we did unwittingly use that during the

:19:12. > :19:20.recession, which is almost 10% of QE was turned into free money through

:19:21. > :19:24.PPI repayments, so getting on for 40 billion was injected into consumers

:19:25. > :19:30.bank's accounts over a period. That is not rally and it goes back to

:19:31. > :19:35.something that was alluding to, because there is somebody on the

:19:36. > :19:41.other side of that transaction, I mean the people who paid up were the

:19:42. > :19:48.shareholders of the beiges concerned is and so it -- banks concerned is

:19:49. > :19:51.so it St a redistribution. But supported by an inflated asset base

:19:52. > :19:59.the Bank of England created for them, right? Well... They were able

:20:00. > :20:03.to pay it with less consequence because of QE, and the money, the

:20:04. > :20:11.transmission process was through the bank. It certainly will have

:20:12. > :20:17.affected the marginal response of the the bank's shareholder, if you

:20:18. > :20:25.like, I mean, they are the people who... They picked up again free...

:20:26. > :20:31.In that sense there is an off set. Things like PPI and what John Mann

:20:32. > :20:35.was referring to, when he introduced his question payments to the coal

:20:36. > :20:46.miners, that was a transfer. I understand that. It was a

:20:47. > :20:51.quasi-transfer, if it is paid by a publicly owned bank and subject to

:20:52. > :20:54.funding and the rest of it is you are giving people a tax rebate. In

:20:55. > :21:02.Australia this is what they have done a couple of times so they have

:21:03. > :21:07.a tax bonus. I was going to say, it is not helicopter money, I mean

:21:08. > :21:12.that, it a es a redistributive tax policy which has a net expansionary

:21:13. > :21:17.demand effect. It was acceptsable to do. It is distinct from helicopter

:21:18. > :21:23.money, which is... There needs to be. I am now going to wind up. We

:21:24. > :21:29.are looking forward very much to receiving the odds and ends I asked

:21:30. > :21:32.for. I shall have to think, it will require a lot of thought and it is

:21:33. > :21:37.one of those cases where we don't know the answer so we thought we

:21:38. > :21:41.would try asking someone else. We are grateful for the evidence we

:21:42. > :21:46.have had. It has been very stimulating as you can tell from the

:21:47. > :21:50.questions we have been posing. We look forward to seeing you in a

:21:51. > :21:51.fortnight. Thank you very much.