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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

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operated take evidence from you this afternoon which is the importance

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that the committee attaches to this subject. Can I begin with the

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question of political economy, maybe to you, Sir Charles. We created on

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an emergency basis are very in usual arrangement -- a very unusual

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arrangement where the bank acquired a huge stock of bombs on its balance

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sheet for which the Treasury, that is the taxpayer out there, voted. --

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they have to bear an indemnity. And the bank has virtual total control

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over what happens to that stock of bonds. And may make errors costing a

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fortune at sometime in the future. Added to which, sitting alongside,

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you could argue, outside the formal remit of the MPC, is the task of

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managing and running of the stock. Have you got the accountability

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arrangements right, what are we going to do for that future, can we

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carry on like this indefinitely? I think you are right to raise this is

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an issue. It is something we are conscious of when the asset purchase

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facility was set up first in 2009. It is a vehicle that is owned by the

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Treasury, the Treasury has the financial interests, so any gains or

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losses ultimately impinge on the taxpayer. And there are two

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particular aspects which are worth drawing attention to. Firstly, it

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explains why every time the MPC wants to make additional asset

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purchases, it has to get the consent of the Chancellor. That was quite

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deliberately, if you like, to try and tie the fiscal authorities into

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the decision. So you could have a situation further down the road

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where people said, the MPC bought X billion of gilts and have made a

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loss, this is all on the taxpayer, who gave them the right to do that?

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So there would also matter could be shed was once ability now with the

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Treasury. -- there would automatically be shared

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responsibility. And it also accounts to why the bank has hitherto been

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very reluctant to go beyond buying predominantly gilts as a counterpart

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to expansion... Which has in turn has aggravated the distributional

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consequences, and had a distorting effect. Even if we had been buying

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other assets, there would still be distributional consequences. It is

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worth saying that to the extent that the MPC in gauges in buying a lot of

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private securities, corporate bonds, mortgage-backed securities,

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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

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private credit instruments, inevitably, you raise the question

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about which companies, which securities you are buying, should

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they favour a particular path. That also has a significant political

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economy dimensional. And for that reason, bank management always

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wanted to try and, if you like, plain vanilla quantitative easy,

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focusing largely on gilts. That is explaining where we are. That is not

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where we are asking, which is where do we go from here, can we carry on

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indefinitely with the management of the stock in this is shape and with

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this line of accountability? And is there a case for some other set of

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arrangements to be put in place? There is certainly an issue... To

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complete that question, after all you yourself said that it is partly

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fiscal policy, not appear monetary policy. Indeed and I think a central

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banks have felt uncomfortable about the extent to which they have been

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polled more and more into territory which is rightly the domain of an

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efficient. -- the domain of politicians. We would like to get

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back to the world of nice simple plain vanilla monetary policy where

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we just manipulate the short-term interest rate. One thing which is

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worth saying, I think it is unlikely that the asset purchases that have

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been made hitherto will lead to a significant cost to the taxpayer, in

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fact, quite the opposite. Stimpy because -- simply because of the

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consequences of the gilts being born, it is very unlikely that there

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will be losses to the taxpayer, and the expectation that is that there

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will be a substantial profit. It should be noted that Sir Charles has

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entered the forecasting business. Circumstances can change. They can

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but it would mean a very big change in the future path of the underlying

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natural interest rate in the world economy to invalidate what I have

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just said. Be you have any suggestions on the accountability

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issue that I am raising today that we should consider, as a group? It

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is a good question, what you might want to put in place to strengthen

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it. Clearly, you are already holding the MPC to account through the

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regular hearings after the inflation report, and that encompasses the

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asset purchases. The question is whether you need to bolster that in

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some way. And I think it is worth just noting that although I pointed

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out that to expand the facility required the formal consent of the

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Chancellor, running down the... Exactly. Running down the facility

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as I hope will happen at some stage in the future, does not formally

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required the Chancellor. Which is an unusual asymmetry. Well, except that

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of course, running down will be associated with putting upward

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pressure on longer-term yields, and most chancellors would be happy to

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see the lower yields, because it is reducing the cost of financing the

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deficit. But therefore will not like it so much when it goes into

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reverse. So I think there would be a problem saying that the Chancellor

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also... You have just touched on one of the moral hazard aspects of this

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that requires some discipline. Indeed. To beat -- to be imposed by

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Parliament by the executive, can I ask you to think about that and come

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back to us on that? I would like your considered suggestions outside

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this, if you could write to us. Professor Miles. I want to offer a

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thought on the longer run. At some point, the degree to which you want

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monetary policy to be expansionary will diminish, I hope we get there

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in my life and within a few years, hopefully. At that point it makes

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sense to start selling most of the assets that it indeed area. I do not

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think that -- that sit in the area. I do not think that is the problem

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with most of the assets that sit in the bank in England. The funding

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that has been made for the purchases so far, the counterpart on the

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liability side of the balance sheet is the reserves of the banking

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system. The reserves before the financial crisis, that the

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commercial banks held in the Bank of England were tiny. In retrospect,

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ludicrously less than should have been held given that we know now...

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There is a target for a larger balance sheet, but not here. I am

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trying to move the discussion on. I dig it is relevant to monitoring how

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the -- I think it is relevant to monitoring how the asset side is

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structured. Supposing the commercial banks want to continue holding as

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many reserves as they have got at the moment, for monetary policies

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purposes, the gilts. To be sold but they could be essentially bought by

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another bit of the back. At that point, most of the assets will not

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be sold, they will sit in another part of the bank which will not be

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the response -- responsibility of the MPC but of the executives of the

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bank who are responsible for the overall balance sheet. They will use

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a different criteria from the monetary policy committee to decide

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what kind of assets they should hold. Can I ask you to also think

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about what you might drop us a line on on this field in a longer term?

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Detlev Schlichter, you are new to the committee, these two are old

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hands, with one hat on or another, with Sir Charles, several hats! What

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do you think about this issue? I think I agree with Sir Charles that

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at first, I think the operation of Q E is more profitable for the central

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bank, as is the case with all of the central banks. They are creating

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bank reserves which are the deposits that the banks hold with the central

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banks, and usually in our environment, the central banks have

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to pay no interest on those reserves. They've buy bought

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interest raising assets as part of the quantitative easing. I am not

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familiar with the specifics of central bank accounting in this

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country, but I am assuming, most countries, the central banks give

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the profits back to the Treasury and in that sense, the Treasury pays

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coupons on government bonds that are held by the central bank, and that

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becomes central bank profits which goes back to the Treasury. As long

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as it holds, that is not a problem. It would arise if you were to be in

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a situation where the central bank wants to off-load these assets and

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do this in a market environment which realises much lower prices for

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this. Maybe a high inflation environment, that could be the case.

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Again I do not think that is very imminent, so I do not think the idea

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that the Q E operation is in the immediate future problem, I do not

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see that as an issue. That is not what I was asking. OK, we make a

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profit, it might be a profit that could have been larger or it may be

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a profit that for various reasons, politicians might have decided not

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to realise at that time, had they control of the assets. It is an

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accountability issue rather than what... Perhaps you would reflect on

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it as well. I will move the questioning on. We have spent some

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time on this already and I know that we have follow-up questions.

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I think you have broadly covered it, but thank you. I wanted to ask about

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the distorted effect of Q E. When we had the governor here last time

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before one, he denied that Mr -- he denied that QE had pumped asset

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prices, do you think that is correct? Has the ultralow interest

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rate of Akrotiri inflated asset prices? I am not familiar with what

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he said. It strikes me as strange to suggest that QE would have no effect

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on asset prices. It was a throwaway remark. It is precisely the primary

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mechanism, how it is supposed to stimulate demand, that the bank buys

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gilts, pays for it with issuing extra reserves, people do something

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with those reserves, that are being issued, that pushes up asset prices

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in general, corporate bond prices and so forth. And that encourages

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investment and higher wealth, and that stimulates demand Jarecki. That

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is the classic transmission methods -- directly. It is the classic

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transition method, the portfolio balancing. There are some other

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mechanisms but I think from the MPC, we always thought that with the

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primary route through which QE operated. The empirical evidence,

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looking at so-called event studies, which is where you look at the

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responses of market prices to announcements of QE programmes,

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suggests that certainly in 2009, when we in the Fed started buying

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assets, that purchases worth around 10% of GDP lower ten -- lowered

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10-year bond yields by little under 100 percentage points. That had

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effects for all asset prices. Are there asset classes where the

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effect is marked or is it generalised? I think at the point

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when asset purchases were being undertaken at its most rapid rate in

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2009, in 20092 ?200 billion of guilts were bought. At the point

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where the asset purchases began, a year later, the market was operating

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more smoothly. Over the one year period, the reduction in corp rate

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bond yields was enormous, far more than the reduction in guild yields.

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I thought at the time it was to sort out high yields in the corp rate

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

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over that year. 20%. Guild years fell by 1%. Partly to do with QE. We

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were buying guilds and the people that bought looked for an

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alternative asset. So it had a big impact on the prices then. I think

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it's been much less since then. There were various studies by the

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Bank of England, the quarrel bulletin, for 2011, the UK's

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quantitative easing policy design operation and impact and the staff,

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the working paper from October last year, all of these studies find

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quantitative easing did have impact on lowering Government bond yields,

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compressing corp rate bond spreads and potentially boosting equity

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prices and weakening sterling. And Sir Charms is correct, this is by

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design. The policy is intended to change market prices. The question

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from my point of view is that it advisable in the long run but if the

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goal was to implement a policy that changes market prices, according to

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the study of the Bank of England, that has been achieved.

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Does that present increased stability risk for the future? I

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think that the first impact of that, if we assume without the policy,

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obviously, yields would have been higher. And quoting the research

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from the Bank of England, without the policy, yields would be higher,

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worn rate bonds wider, and equity prices lower, maybe house prices

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lower, the first thing to recognise by the policies, is that they create

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winners and losers. So the idea, the debate on quantitative easing that I

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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,

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by distributing some companies win, some sectors win, others lose. The

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economy is not just performing at a high level, it's a different

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economy, you have changed the operation of the economy. So in my

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view that's a dangerous direction to take for the reason that we would

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assume in a market, you know, Forsythe example, corporate bond

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spreads or the yields on the Government bond yield curve gives us

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information about the pre-rations of savers and investors that reflect

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the true underlining of corporate debt, so for this to change the

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markets and change the price behaviour, that is a problem.

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I have a slightly different perspective on that. I don't dismiss

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the concerns, what is true is that there is a significant actor in the

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market, clearly affecting the relative rates of return.

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It is certainly creating or has distributional effects.

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It is worth recognising the monetary policy always has distributional

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effects, even through the conventional short-term policy rate.

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The significant difference here is that with normal business cycles,

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people accept sometimes the interest rate is higher, sometimes it's a bit

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lower, sometimes unemployment goes up, sometimes it goes down. There

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are swings and rounds about. What marks out the current episode is

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that it has gone on so long. When we embarked on QE. I thought we would

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be reversing it. Of course, two years, once the emergency was over,

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yet here we are, it is almost a decade since the financial crisis

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started, and we still have a large balance sheet and the bank is

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marginally adding to it at the moment. The Fed has just started to

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normalise policy, when I left the MPC in 2014, I expected well towards

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the end of that year that maybe the bank would be starting to raise

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rates but they have cut it. So the episode has gone on longer. Which I

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think has made people more conscious of the distributional consequences.

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Than would have been the case with regards this if this had been more

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short-lived. I know you have done work on the

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this, the housing market? I suspect that there was a bit of impact of QE

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on the housing market. I don't think it is the strongest impact of QE.

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But it probably brought down the prices of some mortgages a bit. Most

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mortgages sold in the last 10 years have been short-term fixed rate

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mortgages, the pricing of which is sensitive to the position of the

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yielding, not just the Bank of England rate. So it probably made

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mortgages cheaper than they otherwise would have been. Although,

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there are other long-term fundamental factors behind the

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rising of house price factors that have little to do with QE.

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Also, I must declare an interest, I own a business that operates in the

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commercial finances market, it is whether you have looked at or

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considered the anti-except I have impact of QE and the other measures

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that the bank has taken to the extent that big players in the

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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

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been able to in the past, which distorts the market in that way. Is

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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

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been done. I can't remember anything that we have done, the bank, they

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may have done something subsequent to me leaving ares of course. There

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may have been work on the financial stability side that I was not aware

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of. Equally I'm not aware of any work in the academic work since I

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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

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saying that there are a large number of banks and small banks who want

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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.

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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.

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