By balance sheet size, it is the sixth-largest bank in the UK. It has just two directors, both immune from civil prosecution, a piffling £100 in capital and it is not regulated by the Financial Services Authority. It is massively exposed to movements in interest rates and taxpayers are effectively on the hook for any losses it makes.
“It” is the Asset Purchase Facility Ltd, the vehicle set up by the Bank of England to purchase and hold government bonds, using newly created central bank reserves in the process that most people call quantitative easing (QE). The APF has purchased close to £375bn worth of gilts and holds more than a third of all UK government bonds.
Almost four years after it began, the Treasury select committee is taking evidence on whether this huge monetary experiment is actually working, and whom it is hurting; it published over 100 pages of written submissions this week, from academics, lobby groups, consultants and ordinary people such as Thomas Fitch, from whose submission the above factoids were gleaned.
The charge sheet against QE is familiar, but worth revisiting. The first argument is that it is inflationary; the Bank’s own analysis estimated that the first £200bn of QE boosted inflation by up to 1.5 per cent and staved off a deflationary slump. Critics say that this extra dose of inflation has put real incomes under more pressure and disproportionately affected the less well-off. Doom-mongers assert that it is storing up huge problems for the future and debasing the pound.
If QE is boosting inflation, it is far from the only factor – things like higher world food and energy costs or rising consumption taxes can hardly be laid at the door of the Bank. As for the debasement of sterling, that’s been going on for decades; in 1965, a pound bought 11.5 deutschmarks, whereas now it buys the equivalent of two.
Charge number two is that QE has forced savings rates down. The Bank admits that savers forfeited £70bn of interest between September 2008 and August 2012, while borrowers gained £100bn. But again, other factors are at work here, including low base and interbank rates and various government schemes.
The impact on pensions has been far more tangible. Gilt yields are the basis of pension accounting, and the slump in yields has resulted in a well-documented collapse in annuity rates which represents a permanent reduction in income for those affected. Company pension deficits have ballooned as liabilities swelled.
There is an argument that higher asset values have offset lower yields for both companies and individuals. But the Pensions Corporation estimates that liabilities have risen far more, resulting in a net £74bn hit to pension schemes. It seems beyond dispute that QE has been cruel to those approaching or entering retirement.
But perhaps the most interesting bits of the committee submissions are those concerning the effectiveness of QE. Most respondents felt that the first bout, initiated when the banking system was on its knees, was justified. But few felt that subsequent money creation had any effect in the real economy; the extra cash was simply hoarded within the financial system. Several suggested that we do not need money, pointing out that UK plc’s balance sheet is already stuffed with cash. What is needed are incentives to invest it.
The Bank has always robustly defended QE. It’ll be interesting to see what the select committee’s members make of all this, and it’s good that they are finally asking the questions. Let’s hope they send a copy of their final report to Mark Carney before he takes over at the Bank in July.
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