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Order, order, thank you very much for coming to see us. As you can see | :00:29. | :00:34. | |
by looking in our direction, the whole committee without exception is | :00:35. | :00:40. | |
operated take evidence from you this afternoon which is the importance | :00:41. | :00:46. | |
that the committee attaches to this subject. Can I begin with the | :00:47. | :00:52. | |
question of political economy, maybe to you, Sir Charles. We created on | :00:53. | :01:01. | |
an emergency basis are very in usual arrangement -- a very unusual | :01:02. | :01:05. | |
arrangement where the bank acquired a huge stock of bombs on its balance | :01:06. | :01:08. | |
sheet for which the Treasury, that is the taxpayer out there, voted. -- | :01:09. | :01:19. | |
they have to bear an indemnity. And the bank has virtual total control | :01:20. | :01:25. | |
over what happens to that stock of bonds. And may make errors costing a | :01:26. | :01:34. | |
fortune at sometime in the future. Added to which, sitting alongside, | :01:35. | :01:39. | |
you could argue, outside the formal remit of the MPC, is the task of | :01:40. | :01:46. | |
managing and running of the stock. Have you got the accountability | :01:47. | :01:48. | |
arrangements right, what are we going to do for that future, can we | :01:49. | :01:52. | |
carry on like this indefinitely? I think you are right to raise this is | :01:53. | :02:00. | |
an issue. It is something we are conscious of when the asset purchase | :02:01. | :02:05. | |
facility was set up first in 2009. It is a vehicle that is owned by the | :02:06. | :02:11. | |
Treasury, the Treasury has the financial interests, so any gains or | :02:12. | :02:18. | |
losses ultimately impinge on the taxpayer. And there are two | :02:19. | :02:25. | |
particular aspects which are worth drawing attention to. Firstly, it | :02:26. | :02:33. | |
explains why every time the MPC wants to make additional asset | :02:34. | :02:40. | |
purchases, it has to get the consent of the Chancellor. That was quite | :02:41. | :02:45. | |
deliberately, if you like, to try and tie the fiscal authorities into | :02:46. | :02:51. | |
the decision. So you could have a situation further down the road | :02:52. | :02:58. | |
where people said, the MPC bought X billion of gilts and have made a | :02:59. | :03:05. | |
loss, this is all on the taxpayer, who gave them the right to do that? | :03:06. | :03:09. | |
So there would also matter could be shed was once ability now with the | :03:10. | :03:15. | |
Treasury. -- there would automatically be shared | :03:16. | :03:22. | |
responsibility. And it also accounts to why the bank has hitherto been | :03:23. | :03:26. | |
very reluctant to go beyond buying predominantly gilts as a counterpart | :03:27. | :03:33. | |
to expansion... Which has in turn has aggravated the distributional | :03:34. | :03:36. | |
consequences, and had a distorting effect. Even if we had been buying | :03:37. | :03:41. | |
other assets, there would still be distributional consequences. It is | :03:42. | :03:47. | |
worth saying that to the extent that the MPC in gauges in buying a lot of | :03:48. | :03:54. | |
private securities, corporate bonds, mortgage-backed securities, | :03:55. | :03:58. | |
equities, you could have a very big range of assets it might buy, there | :03:59. | :04:04. | |
is obviously the potential on those of losses. Also if you are buying | :04:05. | :04:08. | |
private credit instruments, inevitably, you raise the question | :04:09. | :04:16. | |
about which companies, which securities you are buying, should | :04:17. | :04:19. | |
they favour a particular path. That also has a significant political | :04:20. | :04:28. | |
economy dimensional. And for that reason, bank management always | :04:29. | :04:36. | |
wanted to try and, if you like, plain vanilla quantitative easy, | :04:37. | :04:40. | |
focusing largely on gilts. That is explaining where we are. That is not | :04:41. | :04:44. | |
where we are asking, which is where do we go from here, can we carry on | :04:45. | :04:49. | |
indefinitely with the management of the stock in this is shape and with | :04:50. | :04:54. | |
this line of accountability? And is there a case for some other set of | :04:55. | :05:01. | |
arrangements to be put in place? There is certainly an issue... To | :05:02. | :05:08. | |
complete that question, after all you yourself said that it is partly | :05:09. | :05:13. | |
fiscal policy, not appear monetary policy. Indeed and I think a central | :05:14. | :05:17. | |
banks have felt uncomfortable about the extent to which they have been | :05:18. | :05:21. | |
polled more and more into territory which is rightly the domain of an | :05:22. | :05:29. | |
efficient. -- the domain of politicians. We would like to get | :05:30. | :05:33. | |
back to the world of nice simple plain vanilla monetary policy where | :05:34. | :05:38. | |
we just manipulate the short-term interest rate. One thing which is | :05:39. | :05:44. | |
worth saying, I think it is unlikely that the asset purchases that have | :05:45. | :05:50. | |
been made hitherto will lead to a significant cost to the taxpayer, in | :05:51. | :05:55. | |
fact, quite the opposite. Stimpy because -- simply because of the | :05:56. | :06:03. | |
consequences of the gilts being born, it is very unlikely that there | :06:04. | :06:10. | |
will be losses to the taxpayer, and the expectation that is that there | :06:11. | :06:16. | |
will be a substantial profit. It should be noted that Sir Charles has | :06:17. | :06:20. | |
entered the forecasting business. Circumstances can change. They can | :06:21. | :06:26. | |
but it would mean a very big change in the future path of the underlying | :06:27. | :06:32. | |
natural interest rate in the world economy to invalidate what I have | :06:33. | :06:38. | |
just said. Be you have any suggestions on the accountability | :06:39. | :06:42. | |
issue that I am raising today that we should consider, as a group? It | :06:43. | :06:47. | |
is a good question, what you might want to put in place to strengthen | :06:48. | :06:55. | |
it. Clearly, you are already holding the MPC to account through the | :06:56. | :06:58. | |
regular hearings after the inflation report, and that encompasses the | :06:59. | :07:04. | |
asset purchases. The question is whether you need to bolster that in | :07:05. | :07:11. | |
some way. And I think it is worth just noting that although I pointed | :07:12. | :07:17. | |
out that to expand the facility required the formal consent of the | :07:18. | :07:23. | |
Chancellor, running down the... Exactly. Running down the facility | :07:24. | :07:30. | |
as I hope will happen at some stage in the future, does not formally | :07:31. | :07:34. | |
required the Chancellor. Which is an unusual asymmetry. Well, except that | :07:35. | :07:41. | |
of course, running down will be associated with putting upward | :07:42. | :07:47. | |
pressure on longer-term yields, and most chancellors would be happy to | :07:48. | :07:50. | |
see the lower yields, because it is reducing the cost of financing the | :07:51. | :07:56. | |
deficit. But therefore will not like it so much when it goes into | :07:57. | :08:01. | |
reverse. So I think there would be a problem saying that the Chancellor | :08:02. | :08:05. | |
also... You have just touched on one of the moral hazard aspects of this | :08:06. | :08:08. | |
that requires some discipline. Indeed. To beat -- to be imposed by | :08:09. | :08:17. | |
Parliament by the executive, can I ask you to think about that and come | :08:18. | :08:22. | |
back to us on that? I would like your considered suggestions outside | :08:23. | :08:27. | |
this, if you could write to us. Professor Miles. I want to offer a | :08:28. | :08:36. | |
thought on the longer run. At some point, the degree to which you want | :08:37. | :08:39. | |
monetary policy to be expansionary will diminish, I hope we get there | :08:40. | :08:44. | |
in my life and within a few years, hopefully. At that point it makes | :08:45. | :08:47. | |
sense to start selling most of the assets that it indeed area. I do not | :08:48. | :08:53. | |
think that -- that sit in the area. I do not think that is the problem | :08:54. | :08:58. | |
with most of the assets that sit in the bank in England. The funding | :08:59. | :09:03. | |
that has been made for the purchases so far, the counterpart on the | :09:04. | :09:08. | |
liability side of the balance sheet is the reserves of the banking | :09:09. | :09:11. | |
system. The reserves before the financial crisis, that the | :09:12. | :09:18. | |
commercial banks held in the Bank of England were tiny. In retrospect, | :09:19. | :09:21. | |
ludicrously less than should have been held given that we know now... | :09:22. | :09:29. | |
There is a target for a larger balance sheet, but not here. I am | :09:30. | :09:34. | |
trying to move the discussion on. I dig it is relevant to monitoring how | :09:35. | :09:40. | |
the -- I think it is relevant to monitoring how the asset side is | :09:41. | :09:43. | |
structured. Supposing the commercial banks want to continue holding as | :09:44. | :09:46. | |
many reserves as they have got at the moment, for monetary policies | :09:47. | :09:51. | |
purposes, the gilts. To be sold but they could be essentially bought by | :09:52. | :09:55. | |
another bit of the back. At that point, most of the assets will not | :09:56. | :10:00. | |
be sold, they will sit in another part of the bank which will not be | :10:01. | :10:07. | |
the response -- responsibility of the MPC but of the executives of the | :10:08. | :10:13. | |
bank who are responsible for the overall balance sheet. They will use | :10:14. | :10:16. | |
a different criteria from the monetary policy committee to decide | :10:17. | :10:19. | |
what kind of assets they should hold. Can I ask you to also think | :10:20. | :10:25. | |
about what you might drop us a line on on this field in a longer term? | :10:26. | :10:29. | |
Detlev Schlichter, you are new to the committee, these two are old | :10:30. | :10:34. | |
hands, with one hat on or another, with Sir Charles, several hats! What | :10:35. | :10:41. | |
do you think about this issue? I think I agree with Sir Charles that | :10:42. | :10:46. | |
at first, I think the operation of Q E is more profitable for the central | :10:47. | :10:54. | |
bank, as is the case with all of the central banks. They are creating | :10:55. | :10:58. | |
bank reserves which are the deposits that the banks hold with the central | :10:59. | :11:03. | |
banks, and usually in our environment, the central banks have | :11:04. | :11:07. | |
to pay no interest on those reserves. They've buy bought | :11:08. | :11:20. | |
interest raising assets as part of the quantitative easing. I am not | :11:21. | :11:27. | |
familiar with the specifics of central bank accounting in this | :11:28. | :11:32. | |
country, but I am assuming, most countries, the central banks give | :11:33. | :11:35. | |
the profits back to the Treasury and in that sense, the Treasury pays | :11:36. | :11:39. | |
coupons on government bonds that are held by the central bank, and that | :11:40. | :11:48. | |
becomes central bank profits which goes back to the Treasury. As long | :11:49. | :11:51. | |
as it holds, that is not a problem. It would arise if you were to be in | :11:52. | :11:57. | |
a situation where the central bank wants to off-load these assets and | :11:58. | :12:01. | |
do this in a market environment which realises much lower prices for | :12:02. | :12:05. | |
this. Maybe a high inflation environment, that could be the case. | :12:06. | :12:10. | |
Again I do not think that is very imminent, so I do not think the idea | :12:11. | :12:19. | |
that the Q E operation is in the immediate future problem, I do not | :12:20. | :12:22. | |
see that as an issue. That is not what I was asking. OK, we make a | :12:23. | :12:28. | |
profit, it might be a profit that could have been larger or it may be | :12:29. | :12:32. | |
a profit that for various reasons, politicians might have decided not | :12:33. | :12:40. | |
to realise at that time, had they control of the assets. It is an | :12:41. | :12:46. | |
accountability issue rather than what... Perhaps you would reflect on | :12:47. | :12:50. | |
it as well. I will move the questioning on. We have spent some | :12:51. | :12:54. | |
time on this already and I know that we have follow-up questions. | :12:55. | :13:00. | |
I think you have broadly covered it, but thank you. I wanted to ask about | :13:01. | :13:09. | |
the distorted effect of Q E. When we had the governor here last time | :13:10. | :13:18. | |
before one, he denied that Mr -- he denied that QE had pumped asset | :13:19. | :13:22. | |
prices, do you think that is correct? Has the ultralow interest | :13:23. | :13:26. | |
rate of Akrotiri inflated asset prices? I am not familiar with what | :13:27. | :13:34. | |
he said. It strikes me as strange to suggest that QE would have no effect | :13:35. | :13:38. | |
on asset prices. It was a throwaway remark. It is precisely the primary | :13:39. | :13:44. | |
mechanism, how it is supposed to stimulate demand, that the bank buys | :13:45. | :13:51. | |
gilts, pays for it with issuing extra reserves, people do something | :13:52. | :13:59. | |
with those reserves, that are being issued, that pushes up asset prices | :14:00. | :14:05. | |
in general, corporate bond prices and so forth. And that encourages | :14:06. | :14:13. | |
investment and higher wealth, and that stimulates demand Jarecki. That | :14:14. | :14:17. | |
is the classic transmission methods -- directly. It is the classic | :14:18. | :14:22. | |
transition method, the portfolio balancing. There are some other | :14:23. | :14:27. | |
mechanisms but I think from the MPC, we always thought that with the | :14:28. | :14:30. | |
primary route through which QE operated. The empirical evidence, | :14:31. | :14:36. | |
looking at so-called event studies, which is where you look at the | :14:37. | :14:47. | |
responses of market prices to announcements of QE programmes, | :14:48. | :14:54. | |
suggests that certainly in 2009, when we in the Fed started buying | :14:55. | :14:59. | |
assets, that purchases worth around 10% of GDP lower ten -- lowered | :15:00. | :15:09. | |
10-year bond yields by little under 100 percentage points. That had | :15:10. | :15:10. | |
effects for all asset prices. Are there asset classes where the | :15:11. | :15:20. | |
effect is marked or is it generalised? I think at the point | :15:21. | :15:28. | |
when asset purchases were being undertaken at its most rapid rate in | :15:29. | :15:37. | |
2009, in 20092 ?200 billion of guilts were bought. At the point | :15:38. | :15:42. | |
where the asset purchases began, a year later, the market was operating | :15:43. | :15:48. | |
more smoothly. Over the one year period, the reduction in corp rate | :15:49. | :15:56. | |
bond yields was enormous, far more than the reduction in guild yields. | :15:57. | :16:03. | |
I thought at the time it was to sort out high yields in the corp rate | :16:04. | :16:09. | |
bond market. The yield on the more risky corp rate bonds fell by 20% | :16:10. | :16:16. | |
over that year. 20%. Guild years fell by 1%. Partly to do with QE. We | :16:17. | :16:24. | |
were buying guilds and the people that bought looked for an | :16:25. | :16:28. | |
alternative asset. So it had a big impact on the prices then. I think | :16:29. | :16:35. | |
it's been much less since then. There were various studies by the | :16:36. | :16:39. | |
Bank of England, the quarrel bulletin, for 2011, the UK's | :16:40. | :16:43. | |
quantitative easing policy design operation and impact and the staff, | :16:44. | :16:50. | |
the working paper from October last year, all of these studies find | :16:51. | :16:56. | |
quantitative easing did have impact on lowering Government bond yields, | :16:57. | :17:03. | |
compressing corp rate bond spreads and potentially boosting equity | :17:04. | :17:08. | |
prices and weakening sterling. And Sir Charms is correct, this is by | :17:09. | :17:12. | |
design. The policy is intended to change market prices. The question | :17:13. | :17:17. | |
from my point of view is that it advisable in the long run but if the | :17:18. | :17:23. | |
goal was to implement a policy that changes market prices, according to | :17:24. | :17:26. | |
the study of the Bank of England, that has been achieved. | :17:27. | :17:31. | |
Does that present increased stability risk for the future? I | :17:32. | :17:36. | |
think that the first impact of that, if we assume without the policy, | :17:37. | :17:40. | |
obviously, yields would have been higher. And quoting the research | :17:41. | :17:45. | |
from the Bank of England, without the policy, yields would be higher, | :17:46. | :17:52. | |
worn rate bonds wider, and equity prices lower, maybe house prices | :17:53. | :17:57. | |
lower, the first thing to recognise by the policies, is that they create | :17:58. | :18:02. | |
winners and losers. So the idea, the debate on quantitative easing that I | :18:03. | :18:07. | |
find a problem is that it talks about aggregates. So it boosts GDP | :18:08. | :18:14. | |
or increases price levels and does so by creating winners and losers, | :18:15. | :18:21. | |
by distributing some companies win, some sectors win, others lose. The | :18:22. | :18:26. | |
economy is not just performing at a high level, it's a different | :18:27. | :18:28. | |
economy, you have changed the operation of the economy. So in my | :18:29. | :18:32. | |
view that's a dangerous direction to take for the reason that we would | :18:33. | :18:38. | |
assume in a market, you know, Forsythe example, corporate bond | :18:39. | :18:43. | |
spreads or the yields on the Government bond yield curve gives us | :18:44. | :18:48. | |
information about the pre-rations of savers and investors that reflect | :18:49. | :18:54. | |
the true underlining of corporate debt, so for this to change the | :18:55. | :18:58. | |
markets and change the price behaviour, that is a problem. | :18:59. | :19:02. | |
I have a slightly different perspective on that. I don't dismiss | :19:03. | :19:12. | |
the concerns, what is true is that there is a significant actor in the | :19:13. | :19:17. | |
market, clearly affecting the relative rates of return. | :19:18. | :19:22. | |
It is certainly creating or has distributional effects. | :19:23. | :19:28. | |
It is worth recognising the monetary policy always has distributional | :19:29. | :19:33. | |
effects, even through the conventional short-term policy rate. | :19:34. | :19:38. | |
The significant difference here is that with normal business cycles, | :19:39. | :19:43. | |
people accept sometimes the interest rate is higher, sometimes it's a bit | :19:44. | :19:48. | |
lower, sometimes unemployment goes up, sometimes it goes down. There | :19:49. | :19:53. | |
are swings and rounds about. What marks out the current episode is | :19:54. | :19:58. | |
that it has gone on so long. When we embarked on QE. I thought we would | :19:59. | :20:03. | |
be reversing it. Of course, two years, once the emergency was over, | :20:04. | :20:09. | |
yet here we are, it is almost a decade since the financial crisis | :20:10. | :20:16. | |
started, and we still have a large balance sheet and the bank is | :20:17. | :20:20. | |
marginally adding to it at the moment. The Fed has just started to | :20:21. | :20:31. | |
normalise policy, when I left the MPC in 2014, I expected well towards | :20:32. | :20:36. | |
the end of that year that maybe the bank would be starting to raise | :20:37. | :20:40. | |
rates but they have cut it. So the episode has gone on longer. Which I | :20:41. | :20:46. | |
think has made people more conscious of the distributional consequences. | :20:47. | :20:52. | |
Than would have been the case with regards this if this had been more | :20:53. | :20:58. | |
short-lived. I know you have done work on the | :20:59. | :21:05. | |
this, the housing market? I suspect that there was a bit of impact of QE | :21:06. | :21:11. | |
on the housing market. I don't think it is the strongest impact of QE. | :21:12. | :21:15. | |
But it probably brought down the prices of some mortgages a bit. Most | :21:16. | :21:21. | |
mortgages sold in the last 10 years have been short-term fixed rate | :21:22. | :21:25. | |
mortgages, the pricing of which is sensitive to the position of the | :21:26. | :21:31. | |
yielding, not just the Bank of England rate. So it probably made | :21:32. | :21:35. | |
mortgages cheaper than they otherwise would have been. Although, | :21:36. | :21:42. | |
there are other long-term fundamental factors behind the | :21:43. | :21:44. | |
rising of house price factors that have little to do with QE. | :21:45. | :21:51. | |
Also, I must declare an interest, I own a business that operates in the | :21:52. | :21:57. | |
commercial finances market, it is whether you have looked at or | :21:58. | :22:03. | |
considered the anti-except I have impact of QE and the other measures | :22:04. | :22:08. | |
that the bank has taken to the extent that big players in the | :22:09. | :22:13. | |
market have access ofly quiddity getting low rates, so they are able | :22:14. | :22:18. | |
to dominate over smaller players, the way that they have in the not | :22:19. | :22:24. | |
been able to in the past, which distorts the market in that way. Is | :22:25. | :22:32. | |
there a look at how the QE effectively gives advantage to the | :22:33. | :22:37. | |
bigger markets much more? I have to say I'm not aware of any work that's | :22:38. | :22:42. | |
been done. I can't remember anything that we have done, the bank, they | :22:43. | :22:47. | |
may have done something subsequent to me leaving ares of course. There | :22:48. | :22:51. | |
may have been work on the financial stability side that I was not aware | :22:52. | :22:58. | |
of. Equally I'm not aware of any work in the academic work since I | :22:59. | :23:00. | |
have left. No. | :23:01. | :23:07. | |
It is an interesting phenomena, marketwise with one large dominant | :23:08. | :23:11. | |
player, RBS through Lombard who do not operate under the same rules of | :23:12. | :23:18. | |
moral hazards and share holders and the rest of it, and also have access | :23:19. | :23:25. | |
to cheap funding from the Central Bank and my impression is that it is | :23:26. | :23:32. | |
disstarting lending. But if nobody has looked at it, nobody is bothered | :23:33. | :23:36. | |
about the effect on me and my business but there we are! I | :23:37. | :23:41. | |
wouldn't go that far. One thing, I think that I'm right in | :23:42. | :23:46. | |
saying that there are a large number of banks and small banks who want | :23:47. | :23:52. | |
access the Bank of England's lending facilities, the discount window | :23:53. | :23:56. | |
facilities, the new term funding scheme, a successor to the funding | :23:57. | :24:01. | |
for lending scheme, so those operations that allow banks to brow | :24:02. | :24:06. | |
for relatively long periods at very low interest rates, bank rates, that | :24:07. | :24:09. | |
is not just the big banks can do that. | :24:10. | :24:13. | |
That is true, you need a banking licence and it benefits if you can | :24:14. | :24:18. | |
operate a scale but the small challenge banks don't have the | :24:19. | :24:21. | |
scale. They have the charge rates that allows them to cover the | :24:22. | :24:26. | |
administrations costs but that is disproportionate to them. | :24:27. | :24:31. | |
Sir Charles, have you or the committee done analysis on what | :24:32. | :24:36. | |
might have happened without the QE programme that the bankers pursued | :24:37. | :24:42. | |
over eight years? Yes. The studies that have been carried out about the | :24:43. | :24:50. | |
impact of QE are implicitly telling looking at how they would have done | :24:51. | :24:56. | |
it. The so-called event studies, for the UK and for other companies that | :24:57. | :25:00. | |
suggestion that at least during the worst of the great recession, that | :25:01. | :25:09. | |
10% of GDP bullet purchases would knock about 100 basis points often | :25:10. | :25:14. | |
year yields but if we had not done that, the yields would have been 100 | :25:15. | :25:19. | |
points higher. Where it becomes tenuous is the more interesting | :25:20. | :25:22. | |
question about what was the impact of that on the real economy? And as | :25:23. | :25:31. | |
my next question is inflation... OK. So the bank certainly, while I was | :25:32. | :25:41. | |
there, did work to assess the impact of the cons consequent changes in | :25:42. | :25:46. | |
rates and asset pirateses on the QE programme, how it might have | :25:47. | :25:59. | |
impacted GDP inflation -- asset prices. | :26:00. | :26:09. | |
I have the prices here. Three or four different methods here, that | :26:10. | :26:13. | |
come out on average. The first impact of the first round of QE was | :26:14. | :26:20. | |
?200 billion from sterling in March 2009 to 2010. And about | :26:21. | :26:30. | |
three-quarters of a percent to 1.5% on CPI. | :26:31. | :26:33. | |
The key thing to say about the numbers is that they are not | :26:34. | :26:40. | |
independent assessments of that monetary impulse. The way they were | :26:41. | :26:49. | |
calculated was taking the interest rate responses, that you get from | :26:50. | :26:55. | |
the event studies, and using standard multipliers from the past | :26:56. | :27:01. | |
about how investment and consumption is affected by given change and | :27:02. | :27:11. | |
interest rates. Was there understated impact over | :27:12. | :27:19. | |
that time, over the crisis? That possibly QE, one might say, staved | :27:20. | :27:26. | |
off a sense of crisis and a general lack of money supply, that may have | :27:27. | :27:31. | |
had far less consequences than the Moines you mentioned? I think that | :27:32. | :27:37. | |
is possible. My view is that the first round of QE, 2008, 2009 was | :27:38. | :27:42. | |
likely to be effective not just because of the asset price effects | :27:43. | :27:48. | |
that we have been talking about but the signal sent to the authorities | :27:49. | :27:52. | |
that they were determined to put a flaw under the collapse in the | :27:53. | :27:58. | |
market and all sorts of mistakes in the great depression when GDP | :27:59. | :28:03. | |
collapsed to 25% in the US. So that was a consequence that was | :28:04. | :28:06. | |
important. Are you suggesting that but for QE, | :28:07. | :28:17. | |
2008 and-2010 may have been hit more by depression? It would take more | :28:18. | :28:22. | |
than that. A lot of big mistakes that the Fed and other actors made | :28:23. | :28:26. | |
in the period but I think it helped to put a flaw and stop demand | :28:27. | :28:36. | |
continuing to contract after the initial hit consumption, the | :28:37. | :28:43. | |
collapse of Lehmans. And the initial expectation of this | :28:44. | :28:47. | |
being put in place would be two to three years, it is now almost eight | :28:48. | :28:51. | |
years. The 8th anniversary is probably in a couple of week's time. | :28:52. | :28:56. | |
What conditions do the members of the panel think would have to apply | :28:57. | :29:02. | |
before we inwind QE and what might the consequences be when we do? Can | :29:03. | :29:09. | |
I start with Professor Miles? It is when the economy looks like it is | :29:10. | :29:14. | |
building up more of a head of steam than we have seen over the last few | :29:15. | :29:18. | |
years. And inflation, which in the | :29:19. | :29:21. | |
short-term is going to go above the target level for sure but looks more | :29:22. | :29:26. | |
sustainably will be hovering around the target level. I think that | :29:27. | :29:30. | |
position we may reach soon. I think that the first step would be to | :29:31. | :29:35. | |
start increasing the bank rate off the floor and that would be welcome. | :29:36. | :29:40. | |
That is on a good day. Why would you increase the rates | :29:41. | :29:43. | |
first, rather than unwind QE first? I have two thoughts, one, I think | :29:44. | :29:54. | |
that there are unfortunate side-effects, by having it so very | :29:55. | :29:58. | |
low. But they are probably more serious than the bank holding ?400 | :29:59. | :30:02. | |
billion of guilt. I would like to see that as the first step. What are | :30:03. | :30:06. | |
those consequences which concern you? It is squeezing margins within | :30:07. | :30:13. | |
the banking sector, we probably have got to a level where some banks find | :30:14. | :30:18. | |
it difficult to live with such a low level of bank rate, that problem is | :30:19. | :30:22. | |
less bad than it was a little while ago. But, it still has not entirely | :30:23. | :30:29. | |
gone. I think, if you want to achieve a certain reduction in the | :30:30. | :30:34. | |
expansiveness of policy, my own feeling is it is a very good idea to | :30:35. | :30:40. | |
do it on bank rate first, and the QE sales can come later. Thank you. May | :30:41. | :30:48. | |
I expand on that? First of all, the squeeze on bank profit margins. It | :30:49. | :30:52. | |
is worth saying the reason we stopped at a halfback in the early | :30:53. | :30:56. | |
2009, rather than going in lower, it is precisely because of the | :30:57. | :31:02. | |
potential adverse effects of squeezing bank profit margins even | :31:03. | :31:06. | |
more. Firstly, it might have led to more than falling over, which would | :31:07. | :31:11. | |
have been bad for general confidence, and secondly, that | :31:12. | :31:15. | |
squeeze on bank margins could lead to an impairment, further | :31:16. | :31:18. | |
impairment, in the supply of credit. Obviously, over the last year, the | :31:19. | :31:22. | |
banks look at that again and decided it could safely cut a bit more to a | :31:23. | :31:29. | |
quarter. But, like David, I think there is an argument at least for | :31:30. | :31:37. | |
wanting to try and reverse that, when circumstances are appropriate. | :31:38. | :31:44. | |
Secondly, there are more pragmatic reasons for wanting to get bank | :31:45. | :31:49. | |
rates clear of what you regard as its floor before you start actively | :31:50. | :32:01. | |
selling the APFs assets. That is because you have two set out a | :32:02. | :32:07. | |
programme of asset sales, you do not try and sell 100,000,000,001 day, | :32:08. | :32:12. | |
and sold 25 billion the next over the six months, you do it slowly to | :32:13. | :32:20. | |
keep the markets orderly. Of course, there is always a possibility that | :32:21. | :32:24. | |
you might have an adverse shock over that period and if you have the bank | :32:25. | :32:29. | |
rate clear of the floor, you can cut it. Bank rate becomes the marginal | :32:30. | :32:37. | |
policy. And we certainly took the view, I think it is the right | :32:38. | :32:43. | |
review, you only want to start a programme of asset sales when you | :32:44. | :32:46. | |
are reasonably confident and well clear of the floor, and can do it in | :32:47. | :32:53. | |
a methodical manner of reasonable period. Do you concur with your | :32:54. | :32:57. | |
colleagues on this question? Not quite. If I come back to your | :32:58. | :33:02. | |
question, what are the requirements for us to move to a higher bank | :33:03. | :33:12. | |
rate... At the first QE rate? For either of these things to happen, we | :33:13. | :33:16. | |
would need to see a complete change in the philosophy of the central | :33:17. | :33:26. | |
banks, and monetary policy. They need to assume responsibility, and | :33:27. | :33:29. | |
managed and in the economy. They would not get out of this QE | :33:30. | :33:34. | |
situation in my view. If you have a look globally, or central banks, the | :33:35. | :33:40. | |
first was the bank of Japan in 2000, 2001. None of the central bank so | :33:41. | :33:45. | |
far have been managed to reduce their balance sheet is at all. | :33:46. | :33:50. | |
Ahead, in terms of normalising policy, there is the Federal | :33:51. | :33:57. | |
reserve, managing two hikes in two years. All central banks have moved | :33:58. | :34:00. | |
themselves into the central position. So, step back and say, how | :34:01. | :34:07. | |
can they move into this position? We need to go back. In the Bank of | :34:08. | :34:12. | |
England, between 1997 and 2007, reserves grew by 11% on average | :34:13. | :34:24. | |
every year. That is the nominal monetary growth over a 10-year | :34:25. | :34:30. | |
period every year. -- phenomenal. Why was it done? It was at a time of | :34:31. | :34:35. | |
fairly low inflation because of structural changes, and the governor | :34:36. | :34:38. | |
of the Bank of England explained to this committee about effects like | :34:39. | :34:44. | |
China, the Internet, whatever it was. It was taken as an opportunity | :34:45. | :34:49. | |
to run a bit more of a positive expansion on monetary policy. | :34:50. | :34:53. | |
Inflation would have been lower than 2% if the central bank did not run a | :34:54. | :34:58. | |
more expansionary policy. This policy has affected other parts of | :34:59. | :35:03. | |
the economy. We discussed how it created housing bubbles and massive | :35:04. | :35:13. | |
growth and bank balance sheets. It created accumulation, you see | :35:14. | :35:19. | |
massive growth in a pile of debt. It all came to an end in 2007, 2008. It | :35:20. | :35:26. | |
was a global phenomenon. QE is the logical step, now that they reach | :35:27. | :35:30. | |
lower ground, all of the central bank 's had to buy assets to keep | :35:31. | :35:35. | |
this policy in place. The policy is geared to keep the economy from | :35:36. | :35:39. | |
contracting and at the same time, keeps the debt pile high up. The | :35:40. | :35:46. | |
global economy... The UK coming has an average of 15% GDP since the | :35:47. | :35:51. | |
crisis, made up of public sector really averaging. The top has not | :35:52. | :35:56. | |
changed in this country. In the US, the private sector is higher than | :35:57. | :36:00. | |
2007 when the crisis first started. There is no leveraging in Japan. Now | :36:01. | :36:06. | |
the central banks are stimulating the economy through monetary means, | :36:07. | :36:14. | |
which have an extensive debt location, on the margin, monetary | :36:15. | :36:18. | |
policy becomes less powerful. It becomes ever more difficult to get | :36:19. | :36:23. | |
that extra effect. The diminishing return of monetary policy is | :36:24. | :36:28. | |
massive. And even documented by the Bank of England, when we've talked | :36:29. | :36:31. | |
about quantitative easing. My prediction has to be over the next | :36:32. | :36:37. | |
few years if we see an economic downturn, then we are back to more | :36:38. | :36:42. | |
QE, in all of these economies. I think, unless we see a fundamental | :36:43. | :36:46. | |
change in what monetary policy is about and what it should or should | :36:47. | :36:50. | |
not do, I think we are digging a deeper hole. One quick question and | :36:51. | :36:55. | |
a quick reply if we can... The final question was, that was interesting, | :36:56. | :36:59. | |
you are predicting QE is here to stay for ever. You mentioned there | :37:00. | :37:03. | |
are winners and losers created by the policy, can you briefly outline | :37:04. | :37:08. | |
who you think they are? We will come onto distribution issues in more | :37:09. | :37:12. | |
detail. Can you be brief? It is difficult to say in the short run, I | :37:13. | :37:16. | |
could not even say about pensions, it is very compensated, it depends | :37:17. | :37:23. | |
on your financial position. Recently -- complicated. People who had a big | :37:24. | :37:28. | |
share of their portfolio, it went well and are located in financial | :37:29. | :37:33. | |
assets, benefited. The average household in the UK holds ?1500 in | :37:34. | :37:38. | |
bank deposits, that they have certainly lost. People who have more | :37:39. | :37:42. | |
financial assets tend to be wealthier people and tend to be | :37:43. | :37:46. | |
older. So, there are intergenerational aspect as well. It | :37:47. | :37:51. | |
is very difficult to disentangle all of these effects because the Bank of | :37:52. | :37:55. | |
England has a point when, would there have been more job losses? | :37:56. | :37:59. | |
Potentially, but more companies have closed if these policies had not | :38:00. | :38:03. | |
been done. It is difficult to weigh up all of these impacts. But I think | :38:04. | :38:08. | |
my biggest concern is simply there is no way out of this. A moment ago | :38:09. | :38:13. | |
you said this is a fundamental change in policy. There's no way | :38:14. | :38:18. | |
out. I think that is a good due for Steve | :38:19. | :38:19. | |
questions put are not good afternoon, for Steve Baker to ask | :38:20. | :38:27. | |
some questions. I endorsed his excellent book. Since it is riven | :38:28. | :38:32. | |
today, I should say that I am a seed investor in Glen pay which falls | :38:33. | :38:39. | |
below the deplorable threshold. One of the things I wanted to ask about, | :38:40. | :38:43. | |
I want to come onto ultralow interest rates. For about eight | :38:44. | :38:48. | |
years, with had monetary policy, interest rates, at a level the | :38:49. | :38:52. | |
governor described as extraordinary, if not emergency. Now, I would like | :38:53. | :38:55. | |
to come back to this point about aggregate demand. It seems to me | :38:56. | :39:00. | |
this approach of stimulating the economy through... It is | :39:01. | :39:06. | |
fundamentally Dickensian in producing lower interest rates. I | :39:07. | :39:11. | |
want to give the opportunity to talk about, why it is you think that | :39:12. | :39:17. | |
policy has not produced the effects which were expected, why it has | :39:18. | :39:25. | |
taken longer than expected to get out the position, and where you | :39:26. | :39:32. | |
think it leads? Yeah, I think as I partially referred to in the | :39:33. | :39:36. | |
previous answer, it is... If monetary policy... I think Charles | :39:37. | :39:42. | |
was correct when he said earlier, every kind of monetary policy has a | :39:43. | :39:44. | |
distorting effect. Even when we have convention in Melissa Reid policy. | :39:45. | :39:55. | |
It normally lowers interest rates, and I would call it officially | :39:56. | :39:58. | |
making credit cheaper and encouraging borrowing. In the short | :39:59. | :40:06. | |
run, it is interesting if you look at the analysis the Bank of England | :40:07. | :40:10. | |
has done about QE, from what I can see, they correctly give them credit | :40:11. | :40:16. | |
for lowering borrowing costs and encouraging extra credit and giving | :40:17. | :40:22. | |
a stimulating effect to the economy in the short run. My question is the | :40:23. | :40:26. | |
long runs of the effects of the policy. When that effect is played | :40:27. | :40:30. | |
out, the economy is highly acrid, highly indebted. -- is more highly | :40:31. | :40:38. | |
indebted. Without going too much into economic modelling and every, | :40:39. | :40:45. | |
there's a line of thought that would save the extent to which we can | :40:46. | :40:49. | |
create credit in the economy depends on how much voluntary saving we have | :40:50. | :40:57. | |
on the other side. Interest rates affect the relative price which | :40:58. | :41:01. | |
helps us allocate savings and determine to what extent the Conley | :41:02. | :41:03. | |
can build up and sustain the capital structure that | :41:04. | :41:09. | |
pays off in the long run -- the economy. It is a productive | :41:10. | :41:17. | |
structure which gives return further down the road. That is what low | :41:18. | :41:21. | |
interest rates do. If they are artificially lowered you have a | :41:22. | :41:26. | |
higher build-up of credit. You have more investment, which at first | :41:27. | :41:29. | |
sounds good but they may not be supported by the voluntary decisions | :41:30. | :41:36. | |
of the public. It is, if you like, an artificial credit boom. Central | :41:37. | :41:40. | |
banks can do that and in the short run we see the effect of shorter | :41:41. | :41:45. | |
growth, high employment and high inflation. All of the effects | :41:46. | :41:50. | |
between 1997 and 2007 but it comes at the effective distorting the | :41:51. | :41:54. | |
economy and capital allocation which ultimately needs to be corrected. | :41:55. | :42:01. | |
One way, to think about a recession, it is not something that happens by | :42:02. | :42:04. | |
accident, where something goes wrong. Something had gone wrong | :42:05. | :42:09. | |
before, before the recession hits. The recession is almost a process by | :42:10. | :42:15. | |
which the economy forces you to go back to some sort of equilibria. The | :42:16. | :42:23. | |
focus on aggregate demand means we can stimulate the Conley in the | :42:24. | :42:26. | |
short run but we do so by always introducing distortions and balances | :42:27. | :42:31. | |
which will come to haunt us later -- the economy. I bought into the same | :42:32. | :42:36. | |
fundamental analysis, but as Sir Charles explained minutes ago come | :42:37. | :42:40. | |
he expected that we would be an wide QE, I think you said. -- unwinding. | :42:41. | :42:47. | |
I don't wish to be critical but seeking the truth. Can you | :42:48. | :42:55. | |
articulate, what is it you think is the analytical difference that when | :42:56. | :43:02. | |
we went to QE, he thought we would be unwinding it by now, but you've | :43:03. | :43:06. | |
always thought we would never escape from QE until it reaches a logical | :43:07. | :43:11. | |
conclusion. What is the fundamental difference in your analytical | :43:12. | :43:14. | |
framework which has always led you to a fundamental different | :43:15. | :43:21. | |
conclusion. I would like to avoid deep discussions on theory. Simply | :43:22. | :43:28. | |
put, I think if you use the word "Stimulus", the way the Bank of | :43:29. | :43:31. | |
England and other central banks look at that word, it almost sounds like | :43:32. | :43:38. | |
you give an initial kick to the economy which gets it going and then | :43:39. | :43:42. | |
moves by itself again, like you start an engine. It keeps running | :43:43. | :43:49. | |
again. While I think if you look in detail at the processes which evolve | :43:50. | :43:54. | |
if you interfere in the monetary processes and inject more money into | :43:55. | :43:58. | |
the economy, create artificially low interest rates, you change it. The | :43:59. | :44:02. | |
fundamental point is, it is not a stimulus that simply gives a | :44:03. | :44:07. | |
commission to the Conley, if that had been the case, I think yes, | :44:08. | :44:12. | |
certainly we should be out by now -- economy. The economy would have | :44:13. | :44:18. | |
responded and it operates again normally. But, in fact, the policy | :44:19. | :44:23. | |
introduces dislocation and, one of those is that there must maintain | :44:24. | :44:29. | |
high debt levels which way on the economy and make it more difficult | :44:30. | :44:34. | |
for inflation to pick-up and more difficult for proactivity to rise. | :44:35. | :44:38. | |
And more difficult for the economy to grow alone so it falls and needs | :44:39. | :44:43. | |
more medication. The economy is overmedicated with monetary policy. | :44:44. | :44:48. | |
So, it's that monetary policy has real effects on the economy and that | :44:49. | :44:55. | |
matters and that explains, if I am correct, that explains the | :44:56. | :44:59. | |
difference in the way the world has worked out compared to what you | :45:00. | :45:03. | |
thought at the start of QE? What's your answer to that analysis you | :45:04. | :45:08. | |
have heard, and if you have an analysis that suggests that is | :45:09. | :45:14. | |
wrong, to what do you attribute the world turning out differently to | :45:15. | :45:17. | |
what you expected when you started? OK. There are extra ingredients that | :45:18. | :45:23. | |
are important to bring into this. It is very important to realise that | :45:24. | :45:28. | |
interest rates are not low solely because of monetary policy | :45:29. | :45:33. | |
decisions. And absolutely key underlying driver | :45:34. | :45:38. | |
of where we are has been the remothersless decline in the | :45:39. | :45:41. | |
underlying real interest rate that is consistent with the economy | :45:42. | :45:47. | |
being, and here this is the world economy, and there's several forces | :45:48. | :45:55. | |
that played into that. Relatively high savings, associated with | :45:56. | :45:59. | |
demographics, partly with the integration of China in into the | :46:00. | :46:03. | |
world economy, a fall off in investment which may partly be | :46:04. | :46:07. | |
associated with a shift in the nature of production away from the | :46:08. | :46:11. | |
physical capital to greater reliance on human capital, where you don't | :46:12. | :46:16. | |
invest so much in opinions, also slower population growth in there, a | :46:17. | :46:23. | |
change in preferences and availability of risk averse, | :46:24. | :46:27. | |
vis-a-vis safe at it, so a number of mechanisms. But it is important to | :46:28. | :46:32. | |
realise that the trend dates back to the starting in the late 1990s, | :46:33. | :46:40. | |
which is prove crisis and is a part of the driver for what actually | :46:41. | :46:44. | |
happened in the crisis, the build up in debt. So I wouldn't put all of | :46:45. | :46:50. | |
the blame on monetary policy, it is a number of things here. There is | :46:51. | :46:57. | |
certainly a significant part of what has been said that I would agree | :46:58. | :47:03. | |
with, so monetary policy has real effects, if it didn't, there | :47:04. | :47:07. | |
wouldn't be much point in us doing it! And more to the point, monetary | :47:08. | :47:13. | |
policy should be expected to fill in dips in the demand. You can use it | :47:14. | :47:20. | |
in a transitory way but you cannot sustain a higher level of demand | :47:21. | :47:25. | |
permanently through running a loser monetary policy and bringing demand | :47:26. | :47:29. | |
from the future to the present, essentially by browing. You do end | :47:30. | :47:35. | |
up building bigger and bigger debt stops and that creates problems | :47:36. | :47:39. | |
further down the road. There may be ways to mitigate the risks but | :47:40. | :47:45. | |
ultimately that is not a world you want to be living in, where the only | :47:46. | :47:50. | |
way you can have demand high enough is by building up bigger and bigger | :47:51. | :47:59. | |
debt stops. So I am at one with Detlev's concerns there. There are | :48:00. | :48:03. | |
more moving parts, perhaps, than he suggested. | :48:04. | :48:07. | |
I think we are all agreed that there are many moving parts. If I may, | :48:08. | :48:14. | |
what I am trying to drive into, given the detailed structural | :48:15. | :48:18. | |
dislocations caused by monetary policy, why is it you think that the | :48:19. | :48:23. | |
world turned out differently, give than the analysis is as you set out, | :48:24. | :48:28. | |
why is it over the last eight years, the world has not turned out as you | :48:29. | :48:37. | |
expected eight years ago, as I think Detlev think it is has turned out | :48:38. | :48:47. | |
the way that he Essex pacted? That we would not escape low interest | :48:48. | :48:54. | |
rates and QE? It takes a lot longer to recover from a downturn | :48:55. | :48:59. | |
associated with a banking crisis and an excessive build up of debt than | :49:00. | :49:06. | |
from a normal cyclicle recession. Why didn't you foresee that at the | :49:07. | :49:12. | |
time we began QE? What was missing that you expected to announce we | :49:13. | :49:18. | |
could unwind QE? Why was it not possible to foresee that? One can | :49:19. | :49:23. | |
make the argument that we should have been more aware of the | :49:24. | :49:28. | |
historical evidence from previous financial downturns. There is an | :49:29. | :49:34. | |
important book that came out, I think in 2009 it was published, | :49:35. | :49:41. | |
which collected a lot of this information together and then there | :49:42. | :49:47. | |
was work that the IMF did that appeared in 2010, 2011. I remember | :49:48. | :49:52. | |
us having discussions on the MPC about the likely speed of recovery | :49:53. | :49:58. | |
interest the downturn. I think it is fair to say we really only became | :49:59. | :50:06. | |
fully conscious of the likelihood of a slow recovery during 2012 with | :50:07. | :50:12. | |
that we had the biggest inroads? I am keen to bring in Professor Miles | :50:13. | :50:24. | |
but can you answer, suppose Detlev is right, that monetary policy has | :50:25. | :50:29. | |
not been allowed to unwind because we have maintained extraordinary | :50:30. | :50:35. | |
monetary policy, could the dislocations explain why the | :50:36. | :50:40. | |
recovery has not been kick-started? I am sceptical of that. When you | :50:41. | :50:46. | |
talk about dislocations, I'm not really sure what you have in mind | :50:47. | :50:51. | |
here. Clearly what is true is if interest | :50:52. | :50:57. | |
rates are low... That encourages investment of sorts. If those | :50:58. | :51:03. | |
investments are mistakenly made on the rates, that the rates stay low | :51:04. | :51:09. | |
forever and they don't, then there is a subsequent... I would like to | :51:10. | :51:16. | |
bring in Professor Miles and I will have Detlev answer that question. | :51:17. | :51:22. | |
Two brief things. The first is, I think, the reason why most people on | :51:23. | :51:27. | |
the committee in 2009 thought that we would be out of the woods, in a | :51:28. | :51:33. | |
sense, by now, and no longer having interest rates as low as they are, | :51:34. | :51:39. | |
was I think then most of us did not think that the damage done by the | :51:40. | :51:45. | |
banking crisis was as bad and as long lasting as it has turned out to | :51:46. | :51:49. | |
be. And that is the answer to that. And maybe we should have. The | :51:50. | :51:56. | |
banking industry, as you will know, it came within a smidgeon of totally | :51:57. | :52:02. | |
collapsing and the damage was much more serious than I thought, even | :52:03. | :52:09. | |
into 2009 and 2010. And one other thing, I do think that the global | :52:10. | :52:13. | |
decline in real interest rates, which is nothing to do with very low | :52:14. | :52:19. | |
nominal interest rates since the crisis or the asset purchases is if | :52:20. | :52:24. | |
anything even more powerful than suggested, that I would date the | :52:25. | :52:31. | |
beginning of the decline in what you may call the global interest rates | :52:32. | :52:37. | |
earlier than Charlie mentioned, I think the 198 #0s. The yield on long | :52:38. | :52:43. | |
dated index bonds when they were launched in the 1980s was 4%. Or so. | :52:44. | :52:50. | |
It declined to about half of that level by the mid- 000s. It carried | :52:51. | :52:56. | |
on that trajectory since then. It is now slightly negative. The Bank of | :52:57. | :53:00. | |
England has not bought any long dated index linked bonds. So I think | :53:01. | :53:06. | |
it unlikely to be strongly related to asset purchases. And the Bank of | :53:07. | :53:11. | |
England sets a short-term nominal interest rate, whereas I'm looking | :53:12. | :53:14. | |
at a long-term real interest rate. So the scale of that decline is | :53:15. | :53:20. | |
absolutely enormous. The extra damage to the banking | :53:21. | :53:26. | |
system that speaks to the dislocations... A quick rejoiner | :53:27. | :53:35. | |
there... What are the dislocations that concern you? So why was the | :53:36. | :53:41. | |
monetary policy not effective, it is as the central bank lost the banking | :53:42. | :53:46. | |
system. The system was expanded before the crisis and as the banks | :53:47. | :53:51. | |
look after the balance sheets, they are obviously under heavier | :53:52. | :53:54. | |
regulation, they are simply not lending. In the 1990s, the bank | :53:55. | :54:01. | |
reserves were 11%. And broader aggregates by 6 to 8%. Because of | :54:02. | :54:07. | |
QE, the last eight years, the balance sheet of the Bank of England | :54:08. | :54:16. | |
grew by more than 20% on each yield average but broader aggregates only | :54:17. | :54:23. | |
by 2 or 4%. That is the reason the recovery is weak and inflation low, | :54:24. | :54:28. | |
so the Bank of England, and other central banks, in spite of a policy | :54:29. | :54:33. | |
of quantitative easing, the impact has been much smaller. My concern is | :54:34. | :54:37. | |
that they are pushing ever harder. Thank you very much. In the latest | :54:38. | :54:44. | |
round of QE, the bank have expanded the range of assets it purchases, it | :54:45. | :54:49. | |
is now purchasing corporate bonds as well. The bank said that the | :54:50. | :54:53. | |
purchases are likely to provide a greater stimulus than that provided | :54:54. | :54:58. | |
so far. Sir Charles and Professor Miles, | :54:59. | :55:06. | |
were you were on the MPC, the assets were not purchased, why was that? We | :55:07. | :55:11. | |
did buy corporate bonds. In 2009. | :55:12. | :55:18. | |
The purpose or the mode of buying was slightly different. So the asset | :55:19. | :55:23. | |
purchase facility, when set up, the first things it bought were the | :55:24. | :55:29. | |
corporate bonds. That was because of the illy quiddity in the corporate | :55:30. | :55:33. | |
bond market and we were acting as a market maker. When the market | :55:34. | :55:39. | |
started to function properly, we exited and sold our holdings. The | :55:40. | :55:44. | |
current conjunction tower, it is more like a conventional monetary | :55:45. | :55:50. | |
policy it is conventional and unconventional, QE but it is not | :55:51. | :55:54. | |
buying guilds but corporate bonds. The first thing to be said is that | :55:55. | :56:01. | |
the corporate bond market in the UK is not huge, the sort of scale of | :56:02. | :56:11. | |
action that we judge was necessary back in 2009/2010. If it was | :56:12. | :56:19. | |
corporate bonds of the market, it could only have ever been a | :56:20. | :56:24. | |
relatively small fraction. The issue that I alluded to in my opening | :56:25. | :56:30. | |
response to the chairman, about the concerns about the sort of lit can | :56:31. | :56:39. | |
call economy aspects of buying private securities certainly was -- | :56:40. | :56:46. | |
of political economy aspects of buying private securities certainly | :56:47. | :56:51. | |
was more questionable territory to get into. If we were going to buy | :56:52. | :56:57. | |
private securities it really ought to be as an agent for the Treasury, | :56:58. | :57:03. | |
for the Chancellor. If the Chancellor decided I want you to go | :57:04. | :57:09. | |
and buy corporate bonds or other private credit instruments, that | :57:10. | :57:14. | |
would be fine, the bank would do it but for the QE operation we thought | :57:15. | :57:23. | |
it was sensible to stick to plain vanilla guilts. There are arguments | :57:24. | :57:29. | |
that pound for pound it is effective to buy the corporate bonds bonds | :57:30. | :57:36. | |
than the guilts. You saw them directly effecting the price that | :57:37. | :57:40. | |
might then have an effect on the real economy but the response to | :57:41. | :57:45. | |
that could be well, you just buy proportionally more guilts to get | :57:46. | :57:49. | |
the same net effect at the end of the day. That was the view that we | :57:50. | :57:52. | |
adopted. So do you think that the decisions | :57:53. | :57:57. | |
in this round of QE were the right ones to expand the purchase into | :57:58. | :58:02. | |
corporate bonds more? You can certainly have a debate about | :58:03. | :58:06. | |
exactly what to buy. But I think that them going into | :58:07. | :58:13. | |
that territory, they have exposed themselves more to political economy | :58:14. | :58:18. | |
questions. So I remember one thing that came up, actually at the time | :58:19. | :58:23. | |
that they announced it, one of the investment bonds that they were to | :58:24. | :58:28. | |
buy was Amazon, which at that moment was in the dispute about its tax | :58:29. | :58:33. | |
burden. Of course, there was adverse criticism of the bank for buying | :58:34. | :58:39. | |
Amazon bonds. So the bank is treading into this difficult | :58:40. | :58:43. | |
territory. Personally, I think that if it's | :58:44. | :58:48. | |
going to do that on a significant scale, that is where you have to | :58:49. | :58:54. | |
start thinking more about the sort of accountability framework that | :58:55. | :58:55. | |
sounds it. Professor Miles, what are your | :58:56. | :59:04. | |
thoughts on the new strategy? When I was on the committee, I was pretty | :59:05. | :59:07. | |
open-minded about whether or not we should buy corporate bonds but I | :59:08. | :59:11. | |
took the view if you were having the kind of impact you wanted on the | :59:12. | :59:16. | |
wider economy, through buying gilts, it was preferable to do it through | :59:17. | :59:19. | |
that because you don't have to get into the issue of RE buying this | :59:20. | :59:26. | |
company or that -- are we buying this part of the company or that? In | :59:27. | :59:32. | |
2009 and 2010, to an extent in 2012, it had a significant impact on the | :59:33. | :59:40. | |
market indirectly through buying gilts. The impact you have by buying | :59:41. | :59:47. | |
gilts is greatest when there are financial dislocations. It was | :59:48. | :59:51. | |
clearly much bigger in 2009 compared to 2012, and I'm sure bigger in | :59:52. | :59:58. | |
2011-12 compared to today. But as I say, my view was always, if you have | :59:59. | :00:03. | |
the impact she wanted through buying gilts, it was preferable to | :00:04. | :00:07. | |
corporate bonds. And for the same reasons are Charles said compared to | :00:08. | :00:13. | |
political economy points? What about the efficacy of it? Partly political | :00:14. | :00:17. | |
economy and I did not feel that nine of us, and the committee, who are | :00:18. | :00:23. | |
not experts on the credit assessment of individual companies, could make | :00:24. | :00:26. | |
a very well-informed decisions about yes, let's buy that but not that. I | :00:27. | :00:32. | |
felt more comfortable, particularly with the scale of purposes, in | :00:33. | :00:36. | |
buying gilts. It comes into the territory of, what is the bank's | :00:37. | :00:40. | |
responsibility and what is the government's? It seems one of the | :00:41. | :00:45. | |
reasons why you had to have such loose monetary policy with interest | :00:46. | :00:49. | |
rates and the QE over recent years is because fiscal policy has been | :00:50. | :00:56. | |
pulling in the other direction with very tight fiscal policy. Do you | :00:57. | :01:00. | |
think they could have been a better balance between fiscal and monetary | :01:01. | :01:04. | |
policy in the last few years, or do you think it has been about right? | :01:05. | :01:10. | |
I'm mindful, the comment you made earlier about, part of the impact of | :01:11. | :01:15. | |
QE has been to keep rates at an incredibly low level and therefore | :01:16. | :01:19. | |
bring forward borrowing. But that is not necessarily happening in terms | :01:20. | :01:22. | |
of government borrowing? It is worth saying the issue here is | :01:23. | :01:32. | |
not just what has happened in the UK, and clearly there are other | :01:33. | :01:36. | |
countries that may have had more fiscal space to exploit than we did, | :01:37. | :01:43. | |
and you can think of country like Germany here. One should certainly | :01:44. | :01:52. | |
recognise, as far as the UK goes, that in 2010, during the depth of | :01:53. | :02:00. | |
the great recession, we had a budget deficit at 10% GDP which was not | :02:01. | :02:04. | |
sustainable. You can debate how you want to close it, but the degree of | :02:05. | :02:07. | |
freedom for manoeuvre on fiscal policy was limited. Now, by virtue | :02:08. | :02:14. | |
of the decisions that have been taken over recent years, the | :02:15. | :02:18. | |
Chancellor potentially has more room to use fiscal policy, should he feel | :02:19. | :02:24. | |
he needs to use it. If you like, that is algebra. The other thing I | :02:25. | :02:28. | |
would say is that fiscal policy is not the answer to everything. You | :02:29. | :02:34. | |
also have structural policies. And potentially, structural policies can | :02:35. | :02:42. | |
affect the amount of saving in the economy and the amount of | :02:43. | :02:45. | |
investment. Again, in different parts of the world, different | :02:46. | :02:51. | |
policies in the atmosphere may have been appropriate. A greater use of | :02:52. | :02:59. | |
those policies mean you can get away with saying it is always monetary | :03:00. | :03:03. | |
policy that has to pick up the ball at the end of the day. Central banks | :03:04. | :03:09. | |
have been the policymaker of last resort around the world which is not | :03:10. | :03:13. | |
a good place for them to be in. I very much agree with you. Professor | :03:14. | :03:17. | |
Miles, do you have any thoughts on this? I think Charlie is right. In | :03:18. | :03:24. | |
2009, fiscal deficit of 10% comedy cannot do that for very long. The | :03:25. | :03:30. | |
stock of debt and net debt to GDP, is getting pretty close to 90%. | :03:31. | :03:37. | |
Having been slightly under 40% before the financial crisis. So, one | :03:38. | :03:42. | |
could describe monetary policy, and people often do, as being tied. | :03:43. | :03:47. | |
Actually, it is allowing the stock of debt to rise enormously compare | :03:48. | :03:52. | |
to GDP. And, we keep pushing back the date, may be very sensibly, at | :03:53. | :03:58. | |
which the government gets back to balance and stop to debt GDP levels. | :03:59. | :04:06. | |
-- stock. I'm reluctant to say that we have been running tight policy. | :04:07. | :04:14. | |
It has certainly been expansive. So there is a difference? Monetary | :04:15. | :04:21. | |
policy has been Lupu expansionary, fiscal policy has allowed an | :04:22. | :04:25. | |
enormous deficit to decline very slowly. -- has been very | :04:26. | :04:33. | |
expansionary. I would not suggest fiscal policy as an alternative, as | :04:34. | :04:42. | |
I explain, my view is by 2007, 2008, it was inevitable. The imbalances | :04:43. | :04:46. | |
that accumulated. One of those is excessive levels of debt. My problem | :04:47. | :04:52. | |
with monetary policy is, since 2009, policy is geared to keep debt levels | :04:53. | :04:56. | |
high or add to them. And expansion would have done the same, or has | :04:57. | :05:01. | |
done. Because, fiscal policy, if you see the composition of debt in the | :05:02. | :05:06. | |
UK, there has been private sector leveraging bird private sector | :05:07. | :05:12. | |
reeler bridging. In that sense, no -- really leveraging. You can make | :05:13. | :05:17. | |
your GDP numbers look better in the short-term but do that with the | :05:18. | :05:22. | |
imbalances that hold the economy in the long term. I would not have | :05:23. | :05:30. | |
suggested that. We have had asset purchasing for a decade. Just last | :05:31. | :05:37. | |
year, we increased it. America has had it for a decade, Japan two. I am | :05:38. | :05:45. | |
interested in why it remains. Is it because the situation is | :05:46. | :05:50. | |
Fraud? And you happen to unwind it? Or is there deep-seated implication | :05:51. | :06:01. | |
in what happens to growth if you unwind those assets gritter might -- | :06:02. | :06:02. | |
fraught. What we have referred to, the two or | :06:03. | :06:15. | |
three decade long phenomenon, it automatically means that you run out | :06:16. | :06:22. | |
of room with the short rate sooner. You have less room there. So you | :06:23. | :06:29. | |
have two resort to asset purchases. So, there is the question about at | :06:30. | :06:34. | |
what point you feel sufficiently confident that you can start | :06:35. | :06:42. | |
reversing that. It is fair to say that probably, most MPC members have | :06:43. | :06:50. | |
tended to be somewhat cautious about the point at which you start moving | :06:51. | :06:57. | |
rates back to normal. Because, there is a symmetry. If you move too late, | :06:58. | :07:03. | |
and inflation gets too high, you know how to stop | :07:04. | :07:13. | |
that. On the other hand, if you tighten policy prematurely, and put | :07:14. | :07:19. | |
the economy into a significant tailspin, it is much harder to get | :07:20. | :07:24. | |
out of it. You have to do another big slug of QE or other things. | :07:25. | :07:33. | |
There is an asymmetry which is a consequence of the floor of | :07:34. | :07:35. | |
effective interest rates. If you did not have it, there would be no | :07:36. | :07:42. | |
consequential asymmetry. That is part of the story... Would it not | :07:43. | :07:47. | |
affected, would it go negative? It is a question about the effective | :07:48. | :07:51. | |
rate, one could certainly argue it is counter-productive to go lower | :07:52. | :07:55. | |
than we are. If you go back to 2009, we thought further cuts might well | :07:56. | :08:03. | |
have a negative effect. On activity, rather than the positive effect. I | :08:04. | :08:14. | |
am not confident that going into negative territory, say, which some | :08:15. | :08:17. | |
central bank 's have done, would actually be stimulus in this | :08:18. | :08:22. | |
country. To paraphrase, into the natural rate of interest exists, and | :08:23. | :08:27. | |
rises sufficiently, manipulating the policy rate with asset purchases, | :08:28. | :08:41. | |
they going to the distant horizon? In terms of negative shocks, yes. | :08:42. | :08:46. | |
Was that your explanation of why you thought QE was here forever? Yes. | :08:47. | :08:55. | |
Because I do think that, given the imbalances of the economy, given one | :08:56. | :09:00. | |
of those being the excessive level of debt, it would be difficult to | :09:01. | :09:05. | |
get rates up and policy rates of the ground meaningfully. So, whenever | :09:06. | :09:10. | |
there are disturbances in the economy, as long as monetary | :09:11. | :09:13. | |
policymakers feel that obligation to demand, they will have two resort to | :09:14. | :09:16. | |
more asset purchases. At one point, you would result in basically | :09:17. | :09:25. | |
reducing bank reserves that the same time. It eliminates the bank | :09:26. | :09:30. | |
reserves that created that process of quantitative easing. The banks | :09:31. | :09:37. | |
lose the rocket fuel for their bank and credit, which is a policy | :09:38. | :09:41. | |
tightening. Reducing the balance sheet is the same as tightening | :09:42. | :09:45. | |
policy on the margin. And in my view, it would be very difficult for | :09:46. | :09:48. | |
any of the central banks to do it meaningfully in the coming years. We | :09:49. | :09:58. | |
leave aside the recent experience of the UK with the fall in the value of | :09:59. | :10:03. | |
the Sterling, short-term inflation. If you look at the medium if we are, | :10:04. | :10:11. | |
in till the natural rate of interest rises, here in the UK, we have a | :10:12. | :10:16. | |
policy rate of zero, we cannot do much with that. We are stuck with, | :10:17. | :10:24. | |
therefore, with quantitative easing as the main monetary policy tool. | :10:25. | :10:30. | |
Does that not lead ultimately to changes in perceptions and | :10:31. | :10:36. | |
expectations about inflation? And to lead us into a deflationary cycle? | :10:37. | :10:41. | |
That is a potential worry, yes. I would certainly get very concerned | :10:42. | :10:47. | |
if I saw medium to long-term inflation expectations. Shifting | :10:48. | :10:55. | |
down into negative territory, now fortunately, in this country, we | :10:56. | :11:01. | |
have been around the target, that would not necessarily continue to be | :11:02. | :11:05. | |
so if there was a big and negative disturbance to the economy. Of | :11:06. | :11:10. | |
course, in Japan. Inflation expectations were allowed to get | :11:11. | :11:17. | |
embedded at a low level, which made it much harder for the BOJ to get | :11:18. | :11:24. | |
out of where it is. And, for a time, it looks like the ECB could slip | :11:25. | :11:33. | |
into that. It is a reason that, I believe, if you do find yourself | :11:34. | :11:37. | |
subject to significant adverse shock, there's an argument for | :11:38. | :11:41. | |
taking quite bold expansionary action straightaway, to try and nip | :11:42. | :11:48. | |
it in the bud. Not keeping the ignition drive. -- drive. But that | :11:49. | :11:56. | |
be using fiscal policy? I use other policies, I would like to emphasise | :11:57. | :12:00. | |
that people should not be fixated on fiscal policy as the only other game | :12:01. | :12:07. | |
in town. There are other policies... Such as... A raft of structural | :12:08. | :12:16. | |
policies. Most obviously, this is going outside of the UK, to give you | :12:17. | :12:21. | |
a good example, the most powerful structural policy which can be | :12:22. | :12:24. | |
implemented to boost investment globally would be enhancing the rule | :12:25. | :12:32. | |
of law in many developing countries. That is the one thing that would | :12:33. | :12:35. | |
encourage investment. Firms do not invest if they expect to be | :12:36. | :12:40. | |
expropriated. Things like the design of the tax system, the way that | :12:41. | :12:45. | |
policies operate, there is a whole range of things you might do. The | :12:46. | :12:52. | |
shift in countries away from unfunded pension schemes, too funded | :12:53. | :12:57. | |
pension schemes, is actually something that goes exactly the | :12:58. | :13:02. | |
wrong way in this environment, which is something that is a structural | :13:03. | :13:07. | |
policy. It does not necessarily require physical change. There are a | :13:08. | :13:11. | |
raft of things you can consider, as well as conventional fiscal action, | :13:12. | :13:15. | |
which has a role if you have fiscal space to do it. Some countries have | :13:16. | :13:21. | |
more space than others. Let me bring in Professor Miles. I have left him | :13:22. | :13:26. | |
out today. When you left MPC, one of your parting shots was to say that | :13:27. | :13:28. | |
we should move reasonably quickly to raising the policy. Do you still | :13:29. | :13:35. | |
share that view? I am more optimistic than some discussions, | :13:36. | :13:39. | |
that we are stuck in a trap of QE never being unwound, I am more | :13:40. | :13:44. | |
optimistic than that. The inflationary rate is pretty much at | :13:45. | :13:49. | |
the target now and will go above it. That is partly to do with the | :13:50. | :13:52. | |
exchange rate, you should look through that but my guess is it | :13:53. | :14:01. | |
settles at 2% or slightly north. Unemployment is under 5%. We should | :14:02. | :14:05. | |
not talk about the UK as if we are stuck in depression. I do feel the | :14:06. | :14:11. | |
point at which we can begin the slow march to something more normal, you | :14:12. | :14:16. | |
know, is on the horizon. I think it could well be. I admit, I look at | :14:17. | :14:22. | |
where the yield curve is right now, the markets anticipation and where | :14:23. | :14:27. | |
bank rate might be. I think it is too gloomy, in the sense that what | :14:28. | :14:31. | |
is priced into the market is bank rate is still at half a percent for | :14:32. | :14:37. | |
five years down the road. I think we would be at something more normal by | :14:38. | :14:39. | |
then. That would be? It is a good question | :14:40. | :14:50. | |
as to what is normal, a bank rate used to be 5%. I don't think that is | :14:51. | :14:55. | |
normal. Real interest rates globally keep coming down. My guess is that | :14:56. | :15:01. | |
normal, looking down the road, beyond superexpansion, may be a bank | :15:02. | :15:07. | |
rate nearer to 2.5 or 3. I think interest rates will be nearer that | :15:08. | :15:13. | |
level than where they are now, even four, five years down the road, even | :15:14. | :15:17. | |
though the markets don't see it that way. | :15:18. | :15:21. | |
How will events in America, impact on interest rates? Yeah, I mean | :15:22. | :15:27. | |
that's a really tough one to try to figure out. | :15:28. | :15:34. | |
It depends what happens to the deficit, it depends what happens to | :15:35. | :15:38. | |
the fiscal plans, whether or not Trump will go ahead with the scale | :15:39. | :15:42. | |
of expansion that the rhetoric suggests. I think that's a hard one | :15:43. | :15:46. | |
to try to figure out. I'm sure we will take a look at | :15:47. | :15:54. | |
American effects on the global economy, including ours at other | :15:55. | :15:59. | |
sessions. We should not expand on that now, it is clearly QE with are | :16:00. | :16:03. | |
concentrating on. I have a question on three subjects, | :16:04. | :16:14. | |
the first is to both Professor Miles and thor long-term interlocking with | :16:15. | :16:19. | |
the committee, when it comes to the mown tear policy, is it your | :16:20. | :16:26. | |
observation or not that there is a significant group-thing in | :16:27. | :16:30. | |
Parliament on the policy? In Parliament rather than on the MPC? | :16:31. | :16:38. | |
In Parliament? That's interesting? I have to say, you're committee seems | :16:39. | :16:44. | |
to be a little bit of a sort of counterto that. But there may be | :16:45. | :16:50. | |
questions about whether your representative of the whole of... | :16:51. | :16:56. | |
You should leave the whole job to us don't you think? I take that as a | :16:57. | :17:06. | |
not sure. I ask the question as I know that John McDonald's monitoring | :17:07. | :17:14. | |
fiscal policy is actually identical to Phillip... Sorry, George | :17:15. | :17:21. | |
Osborne's. That strikes me as more than a | :17:22. | :17:29. | |
curiosity in terms of whether there is monetary policy and I throw that | :17:30. | :17:38. | |
out. I find that intriguing? Ne In some sense, I wouldn't have the | :17:39. | :17:45. | |
concern if there is a shared view about how monetary policy operates | :17:46. | :17:51. | |
because I think there is enough consensus about how monetary policy | :17:52. | :17:55. | |
operates in general, in Central Banking, across economists and so | :17:56. | :18:01. | |
forth. We may have different views about precise quantitative | :18:02. | :18:03. | |
magnitudes, and some people will have more concern about the adverse | :18:04. | :18:08. | |
consequences of monetary policy actions, and I'm probably halfway | :18:09. | :18:14. | |
between my colleagues, either side there, so I have certainly share | :18:15. | :18:20. | |
some of Detlev's concerns, probably a bit more relaxed. But these are | :18:21. | :18:27. | |
quantitative differences, rather than a completely different concept. | :18:28. | :18:33. | |
Does it matter whether the bank allows its hollings of QE bonds to | :18:34. | :18:38. | |
expire without selling them back into the market? Is that, what would | :18:39. | :18:43. | |
happen? What would be the consequences if they simply sat on | :18:44. | :18:48. | |
them and did knock? That is fine. I think that is the easiest way to run | :18:49. | :18:53. | |
down the facility. To let the bonds mature and not to replace them. | :18:54. | :18:57. | |
Anything that we should worry about if we do that? Snow No. I think that | :18:58. | :19:04. | |
is again, I say it is unlikely to happen as by the time that these | :19:05. | :19:08. | |
bonds mature, we will have had another crisis and the Bank of | :19:09. | :19:12. | |
England would have bought something else but running them off is not a | :19:13. | :19:17. | |
policy. And there is a chunk in there in the | :19:18. | :19:22. | |
first five years that could make it lumpy? Yes. Yes. | :19:23. | :19:28. | |
I I don't think there need be a problem as long as the monetary | :19:29. | :19:32. | |
policy took the view that the scale of tightening implied by letting the | :19:33. | :19:38. | |
things roll off happened to coincide with the right monetary policy. It | :19:39. | :19:43. | |
would be an unusual situation. You can always move bank rates to adjust | :19:44. | :19:49. | |
it, so that simply letting them roll off, gave you the overall monetary | :19:50. | :19:53. | |
policy. But I don't think it will happen as the Bank of England's | :19:54. | :19:57. | |
balance sheet looking forward would be bigger than it was before. | :19:58. | :20:04. | |
Don't you think there is merit in that? Is it be to get rid of the | :20:05. | :20:11. | |
stock even if you do adjust interest rates? I have to say, I took the | :20:12. | :20:16. | |
view on the committee that I thought the natural time to stop reinvesting | :20:17. | :20:25. | |
was when you decided that you were on a path to raise rates. So you | :20:26. | :20:32. | |
don't wait until you hit 2% before you stop reinvesting. I think I | :20:33. | :20:37. | |
would say let's stop reinvesting when we have the first hike in bank | :20:38. | :20:42. | |
rate as well. Now that wasn't a view that we shared across the rest of | :20:43. | :20:45. | |
the committee. The committee thought it was more Lord Chief Justicically | :20:46. | :20:51. | |
coherent to say that you keep on reinvesting and maturing bonds until | :20:52. | :20:57. | |
say the 2% point at which you might consider sales. But to me, it seemed | :20:58. | :21:02. | |
natural at least to take the advantage of natural run-off when it | :21:03. | :21:09. | |
was safe to do so. It meant you had to sell fewer bonds actively into | :21:10. | :21:17. | |
the market further down the road. My observation of my own constituent | :21:18. | :21:23. | |
sale over the last 16 years is that by far the single biggest stimulus | :21:24. | :21:29. | |
to the local economy, without question, was the unexpected | :21:30. | :21:39. | |
windfall that came, rightly so, morally, and ethically, by former | :21:40. | :21:45. | |
coal miners, who are relatively poor compared to everybody else in the | :21:46. | :21:51. | |
country, suddenly getting a cheque for industrial injury. Further, I | :21:52. | :22:01. | |
noted that those who got the smaller or middle amounts, spent a huge | :22:02. | :22:08. | |
proportion of that in the local economy, those who got bigger | :22:09. | :22:13. | |
amounts would tend rashally to have things like foreign holidays, or | :22:14. | :22:18. | |
even occasionally timeshares if they got that much but that suggests to | :22:19. | :22:28. | |
me that helicopter money was dismissed too readily as a tool that | :22:29. | :22:35. | |
would have had a huge and easy impact and would have also assisted | :22:36. | :22:43. | |
in the debate, that we talked about dislocation, the dislocation of real | :22:44. | :22:53. | |
wages was not mentioned by anybody. Was helicopter money, in your three | :22:54. | :22:57. | |
views, a valid tool, and might it be a valid tool in the future? OK. The | :22:58. | :23:02. | |
first thing to be said about helicopter money. It is equivalent | :23:03. | :23:09. | |
to conventional bond finances fiscal policy, coupled with quantitative | :23:10. | :23:17. | |
easing by the Central Bank where the asset purchases are never reversed. | :23:18. | :23:22. | |
It is helpful to think about it that way as then you focus on the various | :23:23. | :23:28. | |
elements. As far as the fiscal bit goes, which I have no objection to, | :23:29. | :23:35. | |
conventional helicopter money is not necessarily the most sensible way to | :23:36. | :23:39. | |
boost demand. You would expect for a lot of people, if you just give them | :23:40. | :23:45. | |
a lump sum in cache, a lot of it will be saved. If you can focus it | :23:46. | :23:51. | |
on people who might be relatively poor, credit constrained, things | :23:52. | :23:55. | |
like that, they would have a higher propensity to spend, so it would | :23:56. | :24:01. | |
make sense to try to focus any distribution like that and there may | :24:02. | :24:06. | |
be other fiscal actions which make even more sense, investment spending | :24:07. | :24:10. | |
or things like that. But that is properly the domain of you guys, the | :24:11. | :24:22. | |
fiscal policy. The monetary bit of it, a first key point to make is | :24:23. | :24:27. | |
that the expansionary element is not as big as people often think. The | :24:28. | :24:31. | |
reason why people think helicopter money works is basically it is | :24:32. | :24:36. | |
giving people some wealth. It is costless to produce but the money is | :24:37. | :24:40. | |
valuable to people, so they are made better off and they go out and | :24:41. | :24:45. | |
spend. It's very important to remember the bank reserves pay | :24:46. | :24:52. | |
interest, OK? So essentially QE is changing the duration structure of | :24:53. | :24:59. | |
the stakes liabilities. Fewer gilts and more short-term liabilities | :25:00. | :25:03. | |
which are issued by the bank but the bank is having to pay interest on | :25:04. | :25:07. | |
them. So that the net consequence of that in terms of a wealth injection | :25:08. | :25:13. | |
is much smaller than people think. When you come to the question about | :25:14. | :25:19. | |
oh, well this is a permanent monetary expansion, there is a | :25:20. | :25:23. | |
fundamental question about how on earth you make that credible. It can | :25:24. | :25:27. | |
always be reversed further down the road. We can't tie the hands of our | :25:28. | :25:34. | |
successors, you can't tie the hands of future policy makers. They can | :25:35. | :25:39. | |
always undo whatever you do now. So it is incredible to say you are | :25:40. | :25:44. | |
going to make sure that this injection is permanent and it only | :25:45. | :25:49. | |
applies to part of that money stock anyway. So I think it's a mistake to | :25:50. | :25:54. | |
think there's some new policy weapon that hasn't been tried but it is | :25:55. | :26:00. | |
perfectly reasonable to make the argument, that actually, a | :26:01. | :26:04. | |
well-targeted fiscal intervention might well be something that we | :26:05. | :26:09. | |
should consider at this junction. That's the sort of thing that you | :26:10. | :26:13. | |
should have a debate about and indeed you do have debates about. | :26:14. | :26:16. | |
But it is the role of Parliament, not the central bank. It is very | :26:17. | :26:21. | |
important that the central bank just does the monetary bit of this, not | :26:22. | :26:28. | |
the fiscal bit. I think helicopter money is at the | :26:29. | :26:36. | |
extreme end of monetary policy. I am not a fan of helicopter money. But | :26:37. | :26:42. | |
it illustrates the point very well, helicopter money, I think. Is that | :26:43. | :26:46. | |
the interesting thing, if you give everybody in the economy extra | :26:47. | :26:52. | |
money, the more widely you disperse the newly created money from the | :26:53. | :26:57. | |
bank among the population, the smaller the impact will be on the | :26:58. | :27:02. | |
economy. The reason is this, to take your example of the miners in your | :27:03. | :27:06. | |
constituency, the only real benefit that they have is that they have the | :27:07. | :27:10. | |
money and not everybody else in the constituency has as well. If | :27:11. | :27:15. | |
everybody gets ?10,000 in their bank account, or let's assume everybody | :27:16. | :27:18. | |
gets another whatever they have in money, to have another 10% or 15% or | :27:19. | :27:25. | |
20% more than what is in their bank account today, everybody is richer, | :27:26. | :27:28. | |
nobody's relative position has changed. So take an example, a US | :27:29. | :27:34. | |
fund manager gave this example in discussing helicopter money, where | :27:35. | :27:39. | |
he said lelths assume we all get -- 1 billion tomorrow, would that the | :27:40. | :27:44. | |
no mean there would be huge queues outside of the BMW dealership, | :27:45. | :27:49. | |
obviously not. As the person that sells you the BMW in their account, | :27:50. | :27:55. | |
and the people that put together the BMW would be suddenly richer and | :27:56. | :28:02. | |
this whole argument has been discussed in 1741 by David Hume, he | :28:03. | :28:12. | |
who an essay called "Interest" and said assume that we have doubled our | :28:13. | :28:16. | |
money, what would happen to the economy but the answer is nothing | :28:17. | :28:20. | |
with the one exception that the prices would go up as the position | :28:21. | :28:25. | |
of the people in the economy has not changed. Everybody is richer by a | :28:26. | :28:29. | |
certain amount, so the rational thing to do is that everybody that | :28:30. | :28:35. | |
produces something, would charge more for additional services and | :28:36. | :28:39. | |
everybody that consumes, which is also each of us in a capacity, would | :28:40. | :28:44. | |
be willing to pay the higher prices, so I think that it illustrates that | :28:45. | :28:50. | |
the impact of additional money in the economy and what the bank and | :28:51. | :28:54. | |
the central bank does only impacts on growth because you give the money | :28:55. | :28:58. | |
to some and not to others. The money that is printed today and ends up in | :28:59. | :29:04. | |
the banks, the banks give it to the marginal borrower and does the | :29:05. | :29:08. | |
marginal investment project, which would not have been done had the | :29:09. | :29:14. | |
money not been in the economy. So that is what develops the extra | :29:15. | :29:20. | |
activity. If you give everybody the same improvement in nominal money, | :29:21. | :29:24. | |
the only thing that changes is inflation, and no real economic | :29:25. | :29:25. | |
gain. I think secret shall thing about | :29:26. | :29:33. | |
helicopter drops, there's a problem about it, -- the crucial thing. You | :29:34. | :29:42. | |
literally hand-out notes to people from a helicopter and threw them | :29:43. | :29:47. | |
into the economy. Of course, that is not institutionally how it could | :29:48. | :29:52. | |
happen. What would end up happening is the money created by so-called | :29:53. | :29:56. | |
helicopter drops would end up as reserves at the Bank of England, not | :29:57. | :30:02. | |
an expansion in the note issue. People have too find it then. If you | :30:03. | :30:11. | |
think of reserves at the Bank of England, if it continues its current | :30:12. | :30:15. | |
strategy of paying interest on reserves, it is exactly equivalent | :30:16. | :30:20. | |
to the UK Government simply financing government expenditure by | :30:21. | :30:23. | |
issuing new bonds that pay the Bank of England bank rate. It is | :30:24. | :30:31. | |
equivalent. Then, as Charlie said, the idea that this is super | :30:32. | :30:35. | |
expansion and evaporates in front of your eyes, I think it is a mistake | :30:36. | :30:40. | |
for people to think that the notes that might be created are like | :30:41. | :30:47. | |
Milton Friedman 's little banknotes. Widen their take on board your... -- | :30:48. | :30:53. | |
why did they not take on board... I have spoken to them many times. I | :30:54. | :30:57. | |
have three more colleagues who would like to come in. It's a longer | :30:58. | :31:00. | |
session than planned and we started a little late but there is a lot of | :31:01. | :31:04. | |
interest. Some of those questions lead neatly on to the debate I | :31:05. | :31:12. | |
wanted to get into, about the distributional impact of QE. In your | :31:13. | :31:20. | |
view, has QE disproportionately benefited wealthy households? Could | :31:21. | :31:23. | |
you say something about the impact of QE, not just about wealth | :31:24. | :31:30. | |
inequality but intergenerational inequality, if you think there's an | :31:31. | :31:31. | |
impact on that? Yeah, I mean, as I said before, it | :31:32. | :31:43. | |
is difficult to disentangle all of the effects of QE, or any monetary | :31:44. | :31:48. | |
policy. I think it is very difficult to subdivide the population, into | :31:49. | :31:54. | |
different buckets and say this group has one, this group has less. We can | :31:55. | :32:01. | |
identify tendencies, and what I would say, I think there's a paper | :32:02. | :32:06. | |
by the Bank of England on this. Yes, it will, on the margin, have | :32:07. | :32:11. | |
benefited people who have financial assets. I think certainly there are | :32:12. | :32:15. | |
those wealthier households. Then, it depends which form you hold assets, | :32:16. | :32:22. | |
and again, most poor or middle-class households hold bank deposits, | :32:23. | :32:27. | |
obviously they would be negatively affected by interest rate policy, in | :32:28. | :32:33. | |
some countries negative rate policy. People who hold equity portfolios | :32:34. | :32:37. | |
will hold lunch oration government securities, which have benefited, -- | :32:38. | :32:45. | |
longer duration. They tend to be older citizens. An interesting | :32:46. | :32:52. | |
study, I'm not sure which publication it was, by the Bank of | :32:53. | :32:54. | |
England or someone else, they showed that part of the population aged | :32:55. | :33:00. | |
over 65, they were the only part of the population which sustained | :33:01. | :33:03. | |
positive growth throughout the financial crisis while other age | :33:04. | :33:08. | |
groups had to cut back. Particularly younger people. I think it's another | :33:09. | :33:15. | |
aspect that we know we had what I considered to be an artificial | :33:16. | :33:19. | |
housing group, between 1997 and 2007. There is the widespread idea | :33:20. | :33:26. | |
that house prices stay high, but people who like to enter the housing | :33:27. | :33:32. | |
market look for lower house prices. It was mixed emotions, the Bank of | :33:33. | :33:36. | |
England says, our policy sustains or avoids sharper drops in house prices | :33:37. | :33:42. | |
but there are those who would not like their house price to drop but | :33:43. | :33:45. | |
people who would benefit from it and it comes to the point of, policy | :33:46. | :33:51. | |
will always benefit and disadvantage others. In the market economy, it | :33:52. | :33:57. | |
happens. If consumer tastes change, it will also affect certain | :33:58. | :34:01. | |
industries. If consumer demand shifts, industry 's decline and had | :34:02. | :34:03. | |
to make lay-offs and industries grow. However, it is a disinterested | :34:04. | :34:13. | |
process driven by society at large. And by consumers. Now, you have a | :34:14. | :34:18. | |
government agency like the Bank of England, which has to make these | :34:19. | :34:22. | |
calls. That is a major problem with quantitative easing. I agree with | :34:23. | :34:29. | |
quite a lot Bowe but I would like to add one or two extra bits. -- a lot | :34:30. | :34:39. | |
Bowe. What we should recall is the important underlying reason for | :34:40. | :34:40. | |
lower interest rates is tech -- tectonic forces. It is not just | :34:41. | :34:53. | |
monetary distribution, a significant driver of house prices is driven by | :34:54. | :35:02. | |
these real factors. You have big distributional shifts which would | :35:03. | :35:07. | |
have taken place anyway. At the margin, QE, because it is designed | :35:08. | :35:12. | |
to stimulate through pushing up asset prices, it will benefit the | :35:13. | :35:21. | |
asset rich. To the cost of those who do not have it but want to acquire | :35:22. | :35:26. | |
them. In that sense, there is an intergenerational angle. However, | :35:27. | :35:32. | |
the complicating factor, because it has indirect effects on the level of | :35:33. | :35:38. | |
activity, those who are disadvantaged because of the asset | :35:39. | :35:42. | |
price movement, younger people, they are more likely to be in work now. | :35:43. | :35:47. | |
They may have higher wages and so forth. So, this is something which | :35:48. | :35:50. | |
goes in the other direction. The net effect, on them, it's not clear | :35:51. | :35:59. | |
which way it goes. It would be different for different individuals | :36:00. | :36:01. | |
and different stages of their life cycle. And so forth. What about | :36:02. | :36:07. | |
thinking about the long-term impacts on younger people? You mentioned | :36:08. | :36:14. | |
potential impact on wages and so on. In the long-term, one of the | :36:15. | :36:17. | |
consequences of where we find ourselves at the moment is the | :36:18. | :36:22. | |
working age population has to pay a great deal towards the retired | :36:23. | :36:27. | |
population to maintain pension costs, particularly because of | :36:28. | :36:31. | |
defined benefits, which, by definition, are defined in spite of | :36:32. | :36:35. | |
what else is going on in the economy. And longer term, in terms | :36:36. | :36:38. | |
of investment in pensions, for example, it may be this younger | :36:39. | :36:43. | |
generation not only pay for their predecessors but pay more for a | :36:44. | :36:46. | |
lower value pension in the longer term. There is a longer term impact | :36:47. | :36:51. | |
in terms of the impact on people who are currently young, compared to the | :36:52. | :36:57. | |
elderly population, the retired population? There are certainly | :36:58. | :37:02. | |
lasting effects. These big, intergenerational shifts, I think, | :37:03. | :37:07. | |
are one of the big stories in the last ten or 20 years. Monetary | :37:08. | :37:12. | |
policy is a marginal player in this, compared to big and deeper tectonic | :37:13. | :37:18. | |
forces. It also increases longevity, that plays in there as well. But, of | :37:19. | :37:23. | |
course, this is territory which is very much the territorial of | :37:24. | :37:27. | |
Parliament, and fiscal authorities. Not the central bank for Stott we | :37:28. | :37:33. | |
will come back to that. The intergenerational things are | :37:34. | :37:35. | |
formidably difficult to work out. I'm not even sure the direction it | :37:36. | :37:45. | |
goes in. If you were about to buy a in unity, it comes down partly | :37:46. | :37:49. | |
because of QE and longer term trends as well, you are worse off. A | :37:50. | :37:56. | |
30-year-old taking out a mortgage to buy your first property, you may | :37:57. | :38:00. | |
find the interest rate you get on a five-year fixed rate mortgage is | :38:01. | :38:04. | |
lower because the Bank of England has managed to push five-year guilt | :38:05. | :38:11. | |
lower. It's interesting to see where intergenerational stuff is. Some | :38:12. | :38:15. | |
young will be worse off than the old. The net impact I think is | :38:16. | :38:20. | |
formidably difficult to work out and is just not obvious, to me anyway, | :38:21. | :38:25. | |
that it is clear, OK, all the better off, younger worse off. I don't | :38:26. | :38:28. | |
think it is like that. -- old are better off. Before Steve comes in... | :38:29. | :38:42. | |
Sir Charles, you made the point quite rightly that there are many | :38:43. | :38:51. | |
things the government could do through fiscal policy, to mitigate | :38:52. | :38:55. | |
some of the consequences of what he described as the marginal impact of | :38:56. | :38:59. | |
monetary policy on wealth and income and equality, and intergenerational | :39:00. | :39:04. | |
equality. I am serious to hear the views of all of you, before handing | :39:05. | :39:10. | |
you back to the chair, is this solely something that should be... | :39:11. | :39:15. | |
Should this issue be solely the preserve of fiscal policy? Or are | :39:16. | :39:18. | |
there appropriate monetary policy responses which should be considered | :39:19. | :39:23. | |
in terms of mitigating against equality? It is not obvious what you | :39:24. | :39:31. | |
have in mind, if they are monetary instruments they probably operate | :39:32. | :39:34. | |
pretty indirectly so they would not be well targeted but I would be very | :39:35. | :39:40. | |
worried about pulling the central bank into having obligations to | :39:41. | :39:49. | |
worry about distributional consequences, or to be given | :39:50. | :39:52. | |
distributional mandate. That really is territory for politicians and | :39:53. | :40:02. | |
Parliament. To decide. We have already seen a degree of mission | :40:03. | :40:08. | |
creep. Happening with Central Bank. Central banks themselves do not want | :40:09. | :40:11. | |
it, they are pulled towards this territory which is generally that | :40:12. | :40:17. | |
which should be inhabited by political actors. And, going the | :40:18. | :40:27. | |
step of actually giving the MPC specific distributional elements to | :40:28. | :40:30. | |
monetary policy remits, I think it would be extremely dangerous | :40:31. | :40:36. | |
territory. If you are concerned about the distributional | :40:37. | :40:38. | |
consequences, I think the right response is for Parliament to decide | :40:39. | :40:43. | |
to do things that are appropriate and address them. If it requires | :40:44. | :40:46. | |
doing something in conjunction with the bank, it can be set up, and the | :40:47. | :40:54. | |
bank acts as a Treasury agent, and so forth. But it should not really | :40:55. | :41:00. | |
be bank executives, the MPC, actively taking decisions to have | :41:01. | :41:09. | |
specific distributional effects. That is my view. It's a complicated | :41:10. | :41:22. | |
topic, I do not think might policy should be dragged into the equality | :41:23. | :41:30. | |
debate. And again, it's already doing way too much. My general view | :41:31. | :41:37. | |
is functioning market economies, they will be the best... It is the | :41:38. | :41:42. | |
best tool for the standard of living to rise through our society. Does it | :41:43. | :41:47. | |
mean you quality? Obviously not, a market economy will not... We know | :41:48. | :41:51. | |
that the outcome will not be equal. Is there reason to believe there | :41:52. | :41:56. | |
will be rising inequality? I do not see that, I don't think that leads | :41:57. | :42:00. | |
to a constant widening of an economy. Quite the opposite. I think | :42:01. | :42:06. | |
one of the phenomena of capitalism is the middle-class, they did not | :42:07. | :42:11. | |
exist in pre-capital Times. If you see this globally, now that the | :42:12. | :42:17. | |
world economy has opened up more, over the last 40 or 50 years, on a | :42:18. | :42:24. | |
global scale, inequality has declined. So, I do not think... | :42:25. | :42:31. | |
Fiscal policy or monetary policy is geared towards giving us a | :42:32. | :42:34. | |
functional market economy. I don't think we have this problem to begin | :42:35. | :42:41. | |
with. Professor Miles? I tend to agree with Charlie. It is | :42:42. | :42:47. | |
problematic to tell the Bank of England that, as well as having an | :42:48. | :42:50. | |
inflation target and financial stability and a limited range of | :42:51. | :42:56. | |
tools, you also have an inequality of more wealth targets to try and | :42:57. | :43:03. | |
hit as well. I think it would be true, even if that would be | :43:04. | :43:07. | |
problematic and even if you could reliably work out what the | :43:08. | :43:10. | |
distributional impact among policy would be. There is also an issue, as | :43:11. | :43:16. | |
I mentioned earlier, I think it is far from obvious what they generally | :43:17. | :43:21. | |
are, those distributional factors. Steve Baker had a question to ask... | :43:22. | :43:27. | |
Be quick. On this very point about it being practically impossible to | :43:28. | :43:31. | |
work out distributional impacts, it points to the problems with what Sir | :43:32. | :43:34. | |
Charles indicated, where the government is, it should do | :43:35. | :43:38. | |
something to address the injustice of redistribution that we aren't | :43:39. | :43:43. | |
sure works. Does it indicate the categorically different kinds of | :43:44. | :43:47. | |
society? The market economy, where distributional 12 and income depends | :43:48. | :43:50. | |
on your ability to adjust what you do, to best meet the needs of other | :43:51. | :43:56. | |
people? As entrepreneurs do. Against a society where there is a very high | :43:57. | :43:59. | |
degree to which your wealth and income is determined by unknown | :44:00. | :44:04. | |
consequences of decisions by authority, I am just putting it to | :44:05. | :44:09. | |
you. Isn't it categorically different kind of society to market | :44:10. | :44:10. | |
society? I gave a lecture on this to the | :44:11. | :44:24. | |
first years LSE last week. I think you are right, but there is no | :44:25. | :44:29. | |
guarantee that the distribution of income, that comes out of a well | :44:30. | :44:34. | |
functioning market economy, as debt left said is one that we find | :44:35. | :44:40. | |
socially acceptable. -- Detlev. The final you do find it acceptable, the | :44:41. | :44:47. | |
best way to deal with that is through redistributed taxation | :44:48. | :44:50. | |
rather than direct intervention in market economy. We are going to move | :44:51. | :44:56. | |
on. We are going to stay in the same field. I want to ask one question | :44:57. | :45:00. | |
about low interest rates first, I am not going to go down the theoretical | :45:01. | :45:08. | |
line Steve went down, but to ask a practical question, we can all | :45:09. | :45:12. | |
understand and imagine if we cut interest rates from 8% to 5%, then | :45:13. | :45:18. | |
all sorts of investment projects round the economy become economic, | :45:19. | :45:22. | |
and so people borrow some money from the bank and go ahead and the | :45:23. | :45:26. | |
economy whizzes off. But do you really think that cutting interest | :45:27. | :45:31. | |
rates from a half percent to a quarter percent is going to have a | :45:32. | :45:35. | |
significant impact on the number of investment projects that are | :45:36. | :45:39. | |
profitable? I will go to Professor miles first, because he is laughing. | :45:40. | :45:48. | |
No. What was the point of doing it? It may have some small effect at the | :45:49. | :45:55. | |
margin but I don't take the view that the policy package that was | :45:56. | :46:00. | |
announced after the referendum, including the other elements as | :46:01. | :46:04. | |
well, is likely to have had that powerful in effect on the economy. | :46:05. | :46:10. | |
And do you think there have become some level below which, in fact, to | :46:11. | :46:16. | |
say that the lower, the policy lower band isn't naught it is one... In it | :46:17. | :46:22. | |
would be 2009 we took the view the effective lower bound was a that, | :46:23. | :46:28. | |
everyone though in principle decould have gone lower, we thought going | :46:29. | :46:32. | |
low would have been counter productive. I would agree with you, | :46:33. | :46:43. | |
that rate cuts, in the territory we are in rates a solo already, the | :46:44. | :46:47. | |
degree of fraction you get from them is probably pretty low. Good. Fine. | :46:48. | :46:57. | |
I wand to come back to this... I can just ask if these measures Deedn't | :46:58. | :47:02. | |
have much impact on the economy, -- didn't. The Governor must be wrong | :47:03. | :47:07. | |
when he tells us the reason everything is going swimmingly is | :47:08. | :47:12. | |
because there was a stitch in time to save fine, he took the requisite | :47:13. | :47:15. | |
measures that kept the economy on course. My personal view is that may | :47:16. | :47:22. | |
have had a marginal element but I don't think it is the primary reason | :47:23. | :47:28. | |
why growth has surprised us for the up side, in the second half of last | :47:29. | :47:31. | |
year, and I don't want toe say any more than that if you don't mind, | :47:32. | :47:37. | |
for reasons that you understand. Well, you have been so helpful to us | :47:38. | :47:42. | |
so far, and we want more material from you after this, so I suppose we | :47:43. | :47:50. | |
will have to settle for that. Can I suggest I reappear in front of you | :47:51. | :47:58. | |
in two weeks' time? Yes. I think my colleagues are getting bored of me | :47:59. | :48:04. | |
Haye hearing me say this. The Bank of England published a paper in 2012 | :48:05. | :48:15. | |
which that the westiest 5% of households gained ?185,000. Which is | :48:16. | :48:22. | |
annance chute o fortune by most people's standards. So my first | :48:23. | :48:27. | |
question is do you think we show ask the bank to update that piece of | :48:28. | :48:30. | |
work because that is five years ago, do you think that would be a good | :48:31. | :48:39. | |
idea. Remember that is the marginal effect of QE. What do you mean? The | :48:40. | :48:44. | |
effect of QE, if you think about what has happened to wealth, those | :48:45. | :48:53. | |
people took a big hit to their wealth. So... So it was right for | :48:54. | :49:00. | |
the bank to restore it to them? No, no, no, when you put it in isolation | :49:01. | :49:08. | |
it makes it sound like, those people have done very well. You want to set | :49:09. | :49:14. | |
it against the fact that those people got hit and basically well | :49:15. | :49:19. | |
and income in equality hasn't changed hugely. We were told that by | :49:20. | :49:25. | |
the new deputy governor. Sorry Sir Charles, that is not true either. | :49:26. | :49:31. | |
Income inequality has fallen since 2007 but wealth inequality has | :49:32. | :49:34. | |
increased. This is obviously part of it, even if it is not the may jor | :49:35. | :49:42. | |
part of ultra. So when you say you think it is wrong, to give the bank | :49:43. | :49:50. | |
some kind of target, or aspiration, on the distribution, why is it wrong | :49:51. | :49:58. | |
for them to be concerns to make the world less than equal but absolutely | :49:59. | :50:04. | |
fine to make the world more unequal. Let us be clear, the bank did not | :50:05. | :50:12. | |
undertake QE with the ones. I of course I understand that. Of course | :50:13. | :50:23. | |
I understand that. What I said earlier this afternoon was I think | :50:24. | :50:31. | |
it would be you are going down a very slippery slope if you are going | :50:32. | :50:35. | |
to delegate decisions over distribution, direct saying we are | :50:36. | :50:44. | |
giving you an objective to try and achieve, to the MPC or the Bank of | :50:45. | :50:52. | |
England. I think a much better way to approach this, to say if there | :50:53. | :51:03. | |
are distribution alibi products of monetary policy actions then | :51:04. | :51:07. | |
Parliament should appropriate off setting. We have heard from that the | :51:08. | :51:17. | |
bank as well. It is my view. It is not really in in the realm of the | :51:18. | :51:21. | |
politically feasible as I am sure you know. No Chancellor of the | :51:22. | :51:27. | |
Exchequer is going to stand up and announce a tax rise, on capital. We | :51:28. | :51:31. | |
don't have any capital taxes at the moment. No Chancellor is going to | :51:32. | :51:38. | |
stand up in the chamber and announce a tax rise on capital of 185,000 for | :51:39. | :51:43. | |
the wealthiest people, is he. He will have -- we will have tinkering | :51:44. | :51:51. | |
at the edges. Sorry, look... Do you think that is a likely up shot in | :51:52. | :51:59. | |
Well, as I say, if you are concerned about the implications, there have | :52:00. | :52:08. | |
been huge wealth consequences, which swamp the QE impact as a result of | :52:09. | :52:13. | |
this decline in global real interest rates. Huge intergenerational | :52:14. | :52:21. | |
distributional shift, a lot of it intermediatiated through the housing | :52:22. | :52:25. | |
market. I know that. I understand that I agree that the housing market | :52:26. | :52:29. | |
is not in a good state in this country but we are having an inquiry | :52:30. | :52:37. | |
about QE. One of the drawbacks of QE is the impact of dresh distribution. | :52:38. | :52:40. | |
People in the Bank of England and the top five percent of the | :52:41. | :52:47. | |
population may not think it is a lot of money, but my constituents do | :52:48. | :52:53. | |
think it is. So I want to consider whether there is a way that the bank | :52:54. | :53:02. | |
could do the QE that wouldn't have such serious distributional impacts, | :53:03. | :53:06. | |
do you think that there might be. I think the answer to that is probably | :53:07. | :53:14. | |
no, just that the nature of the way QE operates, I don't think can avoid | :53:15. | :53:20. | |
those distributional... I should say I am concerned about the | :53:21. | :53:25. | |
consequence, but I think the right way out is to get the situation into | :53:26. | :53:31. | |
a situation where you don't have to rely on QE and rely on short-term | :53:32. | :53:38. | |
measures, so that is the ideal, as we said earlier, you know, we leaked | :53:39. | :53:46. | |
on QE as an emergency, so this is not somewhere we want to be. I don't | :53:47. | :53:53. | |
think there is a version of QE which can have the effect you want it to | :53:54. | :54:01. | |
have on the general level of demand. Just acoids distributional by | :54:02. | :54:04. | |
products, I think. You may been able to design it in a way that | :54:05. | :54:10. | |
attenuates some of them with a different mix, but it will be a | :54:11. | :54:16. | |
second order. That is what I was going to ask you about. Because the | :54:17. | :54:26. | |
ECB, by different assessed -- -- assets from the Bank of England, | :54:27. | :54:32. | |
they have been die -- buying infrastructure from banks in | :54:33. | :54:37. | |
Germany, France, and they have also got a strand of, which goings | :54:38. | :54:46. | |
towards banks that support SMEs. So I was wondering if, rather than this | :54:47. | :54:50. | |
scatter gun approach, which the bank has, if we had a more drefrkted | :54:51. | :54:57. | |
approach, it it might have different distributional impacts. The first | :54:58. | :55:03. | |
thing to be said is there will be general price, everyone Ferez the | :55:04. | :55:08. | |
asset purchases which are focussed on different, the way QE works is it | :55:09. | :55:17. | |
ripplings out. I have no objection at all, to buying other assets but | :55:18. | :55:24. | |
it should be a decision for the Treasury with the bank acting as its | :55:25. | :55:29. | |
agent. I think that is completely sensible and reasonable. The bank | :55:30. | :55:36. | |
could say we are interested in investing in these things and we | :55:37. | :55:39. | |
think the implications would be better so do it in this way. That... | :55:40. | :55:47. | |
I am happy with that, I do don't see any problem. What I see a problem is | :55:48. | :55:57. | |
the bank doing it off its own back. It seemed what QE did at its most | :55:58. | :56:04. | |
effectives, the first 200 pound in quilt purchases, it tried to bring | :56:05. | :56:10. | |
the bright of a range of equity, corporate bonds, back to where they | :56:11. | :56:14. | |
might have been or closer to where they might have been without the | :56:15. | :56:17. | |
financial crash, so it happens, there is a collapse in equity | :56:18. | :56:26. | |
prices, corporate bond yours goes through the... The first big slug of | :56:27. | :56:33. | |
QE tries to bring the prices back up closes to where they might have | :56:34. | :56:38. | |
been, that collapse in those values wasn't helping anybody. If you look | :56:39. | :56:46. | |
at the action you might in isolation say this just helped rich people. | :56:47. | :56:54. | |
What it was doing was trying to off set imperfectly and only to some | :56:55. | :56:58. | |
extent, an enormous loss having a damaging effect on the economy. So | :56:59. | :57:06. | |
it wasn't here is an action which has retributed wealth to the better | :57:07. | :57:13. | |
off. There is things like anew is lead because gilts had fallen in | :57:14. | :57:18. | |
yield off the crisis partly as a result of asset purchases, make | :57:19. | :57:24. | |
people who have a big pot of money worse off, I think the | :57:25. | :57:30. | |
wealthinequality is murky and not as clear-cut as some would suggest. I | :57:31. | :57:37. | |
thought the 2012 report from the bank didn't quite bring this out in | :57:38. | :57:43. | |
a way it should. People jump on this 185,000 number I think is | :57:44. | :57:45. | |
misleading. But don't you think there is a | :57:46. | :57:51. | |
difference between undertaking a programme of QE in a crisis, and | :57:52. | :57:58. | |
discoring it has this effect and carrying on with it in the knowledge | :57:59. | :58:03. | |
that it tends to have these effects and we are not, the economy is not | :58:04. | :58:12. | |
going at one would wish. That would be a false description. I think the | :58:13. | :58:17. | |
impacts of the they set purchase after that first round have been | :58:18. | :58:20. | |
smallerment whatever you think about these issues I think they are much | :58:21. | :58:24. | |
less significant after that first period. Than in that period. | :58:25. | :58:32. | |
Secondly, I remain of the view that it is very difficult to be clear on | :58:33. | :58:38. | |
what the distributional impacts of low interest rates is. I am going to | :58:39. | :58:44. | |
move the questioning on to Jacob, before I do, I want to ask Charles | :58:45. | :58:49. | |
one question that is related to #134g you have done a bit of work | :58:50. | :58:51. | |
on. You a list of these gave pressures | :58:52. | :59:07. | |
before Kuwait. I have noted them down roughly. The question I want to | :59:08. | :59:11. | |
ask about them is to the extent to which they are going to bottom out. | :59:12. | :59:13. | |
-- before QE. I am looking at them now. You said | :59:14. | :59:27. | |
China, the move away from physical to a knowledge based capital, slow | :59:28. | :59:32. | |
population growth might carry them downwards. Safe assets, there must | :59:33. | :59:39. | |
be a limit to that. These things will carry on at the same rate and | :59:40. | :59:44. | |
so on. Can I ask you to comment on that? Some of those forces are going | :59:45. | :59:51. | |
to potentially continue. This shift in the nature of production, away | :59:52. | :59:59. | |
from physical towards knowledge-based, Internet, and all | :00:00. | :00:07. | |
of that stuff, would be one example. There are a couple of particular | :00:08. | :00:12. | |
things that you might think might reverse. Firstly, headwinds from the | :00:13. | :00:20. | |
financial crisis should be abating. We talked about this earlier, about | :00:21. | :00:28. | |
how quickly they abate. There is a particular aspect which is | :00:29. | :00:32. | |
reversing. A lot of people are focused on increased longevity that | :00:33. | :00:37. | |
hasn't been matched by higher retirement ages. Which means you | :00:38. | :00:43. | |
have to save more to cover your retirement years. But there is | :00:44. | :00:47. | |
another factor, which is potentially important, which hasn't had so much | :00:48. | :00:53. | |
attention, which is the relative size of different age groups. | :00:54. | :00:56. | |
Broadly speaking, the young spend what they get, the middle-aged safer | :00:57. | :01:01. | |
their retirement, and the old do not save. I'm talking locally, not | :01:02. | :01:08. | |
particularly in the UK, it is pronounced in China, as well as some | :01:09. | :01:14. | |
other countries. We had a bolt of the middle-aged, the 40 to 65 age | :01:15. | :01:19. | |
group, which will be doing a lot of asset accumulation ahead of their | :01:20. | :01:29. | |
retirement. -- bulge. Over the last 20 years the difference between the | :01:30. | :01:32. | |
population share of the middle-aged to the old has been going up. We've | :01:33. | :01:36. | |
just reached the point where that has peaked. And it is now going into | :01:37. | :01:43. | |
reverse as people are passing the bulge baby boom -- the bulge off | :01:44. | :01:56. | |
baby-boom generation that is. The US fiscal policy, David said he thought | :01:57. | :02:03. | |
it was unclear. I would expect that also to be putting some upward | :02:04. | :02:07. | |
pressure on local interest rates, as well. There are reasons for | :02:08. | :02:14. | |
expecting some recovery in the underlying natural real rate of | :02:15. | :02:18. | |
interest going forward. It may be relatively slow. I'm not saying it | :02:19. | :02:22. | |
will bounce back up in the next two, three years, but this graphic force | :02:23. | :02:26. | |
that I talked about will be something that will be kicking in | :02:27. | :02:29. | |
ever more strongly over the next decade. That's helpful. Thank you. | :02:30. | :02:36. | |
Jacob, respond. As we are coming to the end of the | :02:37. | :02:39. | |
session it is time to talk about zombies. | :02:40. | :02:44. | |
CHUCKLES There may be some merging in | :02:45. | :02:49. | |
Westminster. Particularly a report on the OECD on zombie companies. The | :02:50. | :02:55. | |
affect low interest rates had on productivity. This allocation of | :02:56. | :03:03. | |
capital is having its own effects. To broaden it out, for example | :03:04. | :03:07. | |
zombie companies, low rates, leading to this having a more negative than | :03:08. | :03:13. | |
positive effect. I would just like to get the views of the panel on | :03:14. | :03:19. | |
that. Yes, there is potentially an element. One of the argument about | :03:20. | :03:25. | |
productivity growth, and why it has been low in this country, since the | :03:26. | :03:30. | |
crisis is in part of the creative destruction. And also when the | :03:31. | :03:37. | |
banking system is impaired. Because banks are reluctant to declare loans | :03:38. | :03:43. | |
that have gone bad because they need enough to repair their balance sheet | :03:44. | :03:49. | |
and so forth. There is an element of that. It is difficult to know how | :03:50. | :03:58. | |
big it is. The key thing during the depths of the downturn is that you | :03:59. | :04:02. | |
don't want to end up killing companies that have a perfectly | :04:03. | :04:09. | |
viable solution. Getting the timing right of any exit is important. I | :04:10. | :04:15. | |
think it is almost certainly the case that there will be some | :04:16. | :04:19. | |
businesses who went interest rates start to rise will find their | :04:20. | :04:22. | |
business models are no longer viable. And capital will be | :04:23. | :04:28. | |
reallocated. Isn't your point that you don't want to destroy viable | :04:29. | :04:38. | |
businesses. Indeed, yes. And continuing these very low interest | :04:39. | :04:41. | |
rate is just extending and delaying the solution of the problem. You | :04:42. | :04:48. | |
said that banks lend to the marginal borrower. The idea that it wouldn't | :04:49. | :04:52. | |
happen if money wasn't going through the banking system. But they still | :04:53. | :04:58. | |
have their money tied up with companies that are good, they don't | :04:59. | :05:04. | |
have the money to lend to that marginal new company, so you delay, | :05:05. | :05:09. | |
is that right, is that too simplistic? That is absolutely | :05:10. | :05:15. | |
correct. To pick up on the phrase Giles used, creative destruction, | :05:16. | :05:20. | |
without destruction there is no creation. You need companies to fall | :05:21. | :05:24. | |
by the wayside. Bankruptcy is part of capitalism as death is part of | :05:25. | :05:31. | |
life. You need to make room for new companies. Part of the general term | :05:32. | :05:40. | |
stimulus policies in the crisis... The crisis, or the recession, also | :05:41. | :05:46. | |
has a cleansing effect. We shouldn't engineer a crisis in order to | :05:47. | :05:51. | |
cleanse. But clearly the recession's response was to a boom which went | :05:52. | :05:56. | |
too far. And stopping the forces of the recession in this cleansing, | :05:57. | :06:01. | |
liquidation process. By definition that must mean that you keep | :06:02. | :06:04. | |
businesses through the recession that should have been weeded out, | :06:05. | :06:08. | |
and should have gone by the wayside. If I can push further. It seems to | :06:09. | :06:14. | |
me that the time quantitative easing started it was the right thing to | :06:15. | :06:18. | |
do. The response to a credit crunch was to make sure money was as | :06:19. | :06:22. | |
available as possible. And we didn't crunch everybody at once. Now people | :06:23. | :06:27. | |
have superlow interest rates for a long period. They've had every | :06:28. | :06:31. | |
opportunity to readjust their affairs, to meet a new reality, and | :06:32. | :06:40. | |
the failure to begin to raise the interest rates is simply delaying | :06:41. | :06:43. | |
any possibility of proper recovery. It has gone beyond the point of it | :06:44. | :06:51. | |
helping and it is now harming. I fully agree. I think part of the | :06:52. | :06:55. | |
problem here is the objective of quantitative easing has shifted. | :06:56. | :06:59. | |
Maybe not so much in the Bank of England. There might be better | :07:00. | :07:05. | |
judges of that. But if you look at the US, the first quantitative | :07:06. | :07:11. | |
easing of the Lehman Brothers collapse was trying to avoid a | :07:12. | :07:16. | |
seizing up of the interbank market. The objective was to take assets | :07:17. | :07:19. | |
from the balance sheets onto the central bank. We placed those with | :07:20. | :07:25. | |
bank reserves. Over supplying the system. So they would not rely on | :07:26. | :07:30. | |
lending excess reserves to each other. And therefore keep banks from | :07:31. | :07:35. | |
collapsing. But then very quickly, certainly by 2010, this new policy | :07:36. | :07:40. | |
objective had changed to one of using quantitative easing to | :07:41. | :07:42. | |
stimulate the economy, to further help it grow. That is unhealthy. You | :07:43. | :07:52. | |
were both hinting at this in your concerns over production rates from | :07:53. | :07:56. | |
half a percent accord of a percent. We actually need our banks to be | :07:57. | :08:03. | |
making money. -- half a percent to a quarter of a percent. We need to | :08:04. | :08:07. | |
give it to companies that need it. But at a quarter of a percent, and | :08:08. | :08:10. | |
in some countries negative interest rates, the bank margins are so low | :08:11. | :08:18. | |
that it is difficult for them to recover from their past mistakes. It | :08:19. | :08:21. | |
is difficult for them to acknowledge genuine bad debts. We want to keep | :08:22. | :08:29. | |
them going. And it is very hard for them to attract deposits because why | :08:30. | :08:31. | |
on earth would you deposit your money with a bank? This is all | :08:32. | :08:37. | |
having a perverse effect. It is damaging the banking system rather | :08:38. | :08:41. | |
than helping it. Whereas before it was essential in helping. I have | :08:42. | :08:45. | |
sympathy with that. I said some time ago. When I left the committee I | :08:46. | :08:55. | |
thought that the time is approaching, the economy was getting | :08:56. | :08:59. | |
back to something of a normal level of operation. The economy is | :09:00. | :09:02. | |
roundabout what we thought was the natural rate of employment and | :09:03. | :09:09. | |
inflation. The exchange rate depreciation and things in the short | :09:10. | :09:14. | |
term you must consider, as well. But that looks reasonably OK. You would | :09:15. | :09:24. | |
be thinking that now is the time to move some of the extraordinary money | :09:25. | :09:28. | |
stimulus. That was hinted at with the formal guidance in 2014. I don't | :09:29. | :09:38. | |
know what you think, Miles, but that seemed the right point to start | :09:39. | :09:42. | |
normalising. I very much agree with you that having interest rates at | :09:43. | :09:47. | |
extremely low levels, and certainly negative interest rates come as | :09:48. | :09:51. | |
something to be avoided. Negative rate in the UK would be extremely | :09:52. | :09:55. | |
unhelpful. I cannot see any strong arguments for doing that at all. I | :09:56. | :10:03. | |
think also that the last time we can spend with interest rates as they | :10:04. | :10:11. | |
are at the moment the better. -- the less. My view is that we are much | :10:12. | :10:15. | |
nearer to that point, that welcome point, where we can start, and I | :10:16. | :10:23. | |
hope we start it pretty soon. How would you start it if it were up to | :10:24. | :10:31. | |
you? So that you don't... You wouldn't put interest rates up, | :10:32. | :10:37. | |
would you? No. What pathway would you follow? Certainly this is | :10:38. | :10:47. | |
something that we talked about collectively as a committee. We were | :10:48. | :10:51. | |
very aware that when the time did come to start tightening policy, you | :10:52. | :10:54. | |
need to communicate pretty carefully. So that you don't get | :10:55. | :11:02. | |
over reaction by the markets. My general approach, in part because we | :11:03. | :11:06. | |
don't know what the impact is going to be after such a long period of | :11:07. | :11:11. | |
very low rates, that you probably want to do it very slowly if you | :11:12. | :11:15. | |
can. Which in itself tells you, start early, you've got increased by | :11:16. | :11:20. | |
a certain amount, start early, go slowly. Start early, the gradual, | :11:21. | :11:30. | |
and stress that this is not about needs... Quite the opposite. Do all | :11:31. | :11:36. | |
three of you agree, or would this be taking it too far, that quantitative | :11:37. | :11:41. | |
easing is now past the point at which it is beneficial, and keeping | :11:42. | :11:44. | |
it going beyond that point becomes actually more harmful than not | :11:45. | :11:51. | |
lowering interest rates? I think it has been harmful all along. I could | :11:52. | :11:55. | |
see in the depth of the crisis, I mean, given the institution of the | :11:56. | :12:04. | |
central bank, part of the Institute has led to this perverse effect. We | :12:05. | :12:11. | |
encourage banks to take more risk. We tell the public that their banks | :12:12. | :12:15. | |
are safe because there is a backing from the central bank. In a way that | :12:16. | :12:20. | |
is a key violation of the principles of a market economy. In that sense | :12:21. | :12:28. | |
it would be against any bank. But that was the institutional | :12:29. | :12:33. | |
arrangement. I think that the depth of the crisis it probably would have | :12:34. | :12:37. | |
been the wrong moment to remove the safety net. Ultimately the safety | :12:38. | :12:42. | |
net will have to be removed. We have to come to a point where we move the | :12:43. | :12:47. | |
central bank. That is my view, it is a radical view, as a last resort. | :12:48. | :12:53. | |
Because it isn't compatible with a functioning market. You decent the | :12:54. | :12:57. | |
FAI 's extra credit creation, which leads to all the problems we | :12:58. | :12:59. | |
discussed here. -- Eugene the impact of quantitative easing is | :13:00. | :13:11. | |
clearly diminishing very rapidly. That is certainly happening. If you | :13:12. | :13:22. | |
would put me on the board of the ECB I would probably think the best | :13:23. | :13:26. | |
course would be just not to do anything and basically... Because I | :13:27. | :13:29. | |
think raising interest rates, quite frankly, as we live in an over | :13:30. | :13:34. | |
lavished economy, where the rate of interest is so low, would be a | :13:35. | :13:37. | |
dangerous policy. I think it would be trite. Then it would kick off | :13:38. | :13:42. | |
another recession. By which point we go to even more of an aggressive | :13:43. | :13:48. | |
policy. The one thing you can clearly ascertain here, where all of | :13:49. | :13:52. | |
these economies are now, we at the point where expenditure... | :13:53. | :14:06. | |
So the position the central bank is in is a dangerous one. They want to | :14:07. | :14:14. | |
move back from this policy for all of the distortions. Distribution of | :14:15. | :14:19. | |
income and wealth. Everybody is uncomfortable. But it is difficult | :14:20. | :14:23. | |
to move away because as long as we haven't allowed the imbalances to | :14:24. | :14:28. | |
clear out, which would probably require an even worse recession in a | :14:29. | :14:32. | |
way, politically that isn't wanted to that puts the central bank under | :14:33. | :14:36. | |
an extraordinarily difficult position. The best thing to do is to | :14:37. | :14:42. | |
tell the market and the system that this is basically it. Here is the | :14:43. | :14:45. | |
level of bank reserves we have, which is plenty, it'll last for the | :14:46. | :14:49. | |
next 50 years, and we are not going to do anything. And banks will pay | :14:50. | :14:55. | |
for it. We are not setting up interest policy, this is it, you | :14:56. | :15:00. | |
know, we become passive. To me that would potentially be the best | :15:01. | :15:01. | |
outcome. Maybe we have a year of minus one or | :15:02. | :15:11. | |
plus one, plus two, I don't know, we will see. But, I think ultimately | :15:12. | :15:17. | |
there would be a better outcome than trying to again and again, try to | :15:18. | :15:24. | |
use monetary policy means to get the economy growing at a rate which it | :15:25. | :15:30. | |
does not sustain. I certainly think the marginal benefit of a given | :15:31. | :15:36. | |
quantum, of asset purchase is less now than it was in the depths of the | :15:37. | :15:43. | |
crisis, for the reason we talked about earlier on, I think the costs, | :15:44. | :15:51. | |
in some of these unwanted side effect, the distributional | :15:52. | :15:56. | |
consequences have come more to the fore, their calculus is much more | :15:57. | :16:01. | |
favourable, which is why if stimulus is required we ought to be looking | :16:02. | :16:07. | |
in other directions. Fiscal rather than monetary. I agree with you on | :16:08. | :16:17. | |
structural. Structural. Passive bank. Passive policy. With the | :16:18. | :16:27. | |
reserve, the reserves actually I am, I wouldn't be worried about them | :16:28. | :16:34. | |
gradually being shrunk, I think the banks have excess is ever -- | :16:35. | :16:38. | |
reserve, I don't think it's a direct linkage. It is the size of their | :16:39. | :16:44. | |
balance sheets at the moment. Professor miles? Believe the impact | :16:45. | :16:51. | |
of changing the stock is lower than it was. I think partly because of | :16:52. | :16:56. | |
that, I don't think there is any reason to feel a a the great urgency | :16:57. | :17:01. | |
in bringing the stock down, just because I think the marginal impacts | :17:02. | :17:07. | |
one way or another are just that, rather marginal. We get no | :17:08. | :17:15. | |
impression the MPCC is thinking along these lines. Is this because | :17:16. | :17:24. | |
if you are on the MPCC, you have got to own propaganda, is it because | :17:25. | :17:28. | |
they have group think, do you have any insight or is this an unfair | :17:29. | :17:34. | |
question and how could you possibly know now you have left it. I don't | :17:35. | :17:38. | |
know what the views are on the committee. It is difficult for a | :17:39. | :17:43. | |
central bank to say we are totally powerless. Well, no, because the | :17:44. | :17:48. | |
adverse effect on confidence of doing that. You know, there is an | :17:49. | :17:55. | |
element of bluff and confidence in this, and even if you think the | :17:56. | :18:03. | |
policy action might itself not have that much traction, doing that at | :18:04. | :18:08. | |
key moments maybe quite important at reinforcing confidence and we | :18:09. | :18:12. | |
discussed what happened in early 2009. The mere fact of the action, I | :18:13. | :18:21. | |
think, added something over and above the technical aspects of the | :18:22. | :18:24. | |
monetary interhavion. -- intervention. So I think that is | :18:25. | :18:29. | |
part of the story. I wouldn't go so far as the to say the bank is out of | :18:30. | :18:35. | |
ammunition, but they are in a much less favourably placed situation | :18:36. | :18:40. | |
than we were in 2009, when we were just embarking on QE. So they are | :18:41. | :18:45. | |
more boxed in. We have ranged, you want to add | :18:46. | :18:50. | |
something in we have had a very interesting session, ranged, you | :18:51. | :18:54. | |
wanted to come in, didn't you. I am very sorry, you had a quick | :18:55. | :19:00. | |
question. I want to press you more on helicopter money. There is is a | :19:01. | :19:06. | |
bit of evidence that we did unwittingly use that during the | :19:07. | :19:11. | |
recession, which is almost 10% of QE was turned into free money through | :19:12. | :19:20. | |
PPI repayments, so getting on for 40 billion was injected into consumers | :19:21. | :19:24. | |
bank's accounts over a period. That is not rally and it goes back to | :19:25. | :19:30. | |
something that was alluding to, because there is somebody on the | :19:31. | :19:35. | |
other side of that transaction, I mean the people who paid up were the | :19:36. | :19:41. | |
shareholders of the beiges concerned is and so it -- banks concerned is | :19:42. | :19:48. | |
so it St a redistribution. But supported by an inflated asset base | :19:49. | :19:51. | |
the Bank of England created for them, right? Well... They were able | :19:52. | :19:59. | |
to pay it with less consequence because of QE, and the money, the | :20:00. | :20:03. | |
transmission process was through the bank. It certainly will have | :20:04. | :20:11. | |
affected the marginal response of the the bank's shareholder, if you | :20:12. | :20:17. | |
like, I mean, they are the people who... They picked up again free... | :20:18. | :20:25. | |
In that sense there is an off set. Things like PPI and what John Mann | :20:26. | :20:31. | |
was referring to, when he introduced his question payments to the coal | :20:32. | :20:35. | |
miners, that was a transfer. I understand that. It was a | :20:36. | :20:46. | |
quasi-transfer, if it is paid by a publicly owned bank and subject to | :20:47. | :20:51. | |
funding and the rest of it is you are giving people a tax rebate. In | :20:52. | :20:54. | |
Australia this is what they have done a couple of times so they have | :20:55. | :21:02. | |
a tax bonus. I was going to say, it is not helicopter money, I mean | :21:03. | :21:07. | |
that, it a es a redistributive tax policy which has a net expansionary | :21:08. | :21:12. | |
demand effect. It was acceptsable to do. It is distinct from helicopter | :21:13. | :21:17. | |
money, which is... There needs to be. I am now going to wind up. We | :21:18. | :21:23. | |
are looking forward very much to receiving the odds and ends I asked | :21:24. | :21:29. | |
for. I shall have to think, it will require a lot of thought and it is | :21:30. | :21:32. | |
one of those cases where we don't know the answer so we thought we | :21:33. | :21:37. | |
would try asking someone else. We are grateful for the evidence we | :21:38. | :21:41. | |
have had. It has been very stimulating as you can tell from the | :21:42. | :21:46. | |
questions we have been posing. We look forward to seeing you in a | :21:47. | :21:50. | |
fortnight. Thank you very much. | :21:51. | :21:51. |