Quantitative Easing — House of Commons, 2016-09-15
Topic: Macroeconomics
Steven John Baker (Conservative, Centre-right): I certainly agree with the hon. Gentleman. Indeed, the Bank of England’s Andy Haldane said that the Bank had deliberately inflated the biggest bond market bubble in history. That is not a literal quote because I do not have it before me, but that is broadly what he said. If we look at the period 1997 to 2010, the period before the crisis, and look at the regional distribution of house prices, we find an eerie correlation between it and the increase in the money supply. That distribution of changes correlates with what one might expect of Cantillon effects—in other words, in London and the south-east, house prices rocket away quicker and earlier, while in the north-east and Scotland, house prices increase more slowly as the money spreads out. My point is that there is a good case for saying that Cantillon effects and the increase of the money supply have a profound effect not only on particular assets, but on the regional distribution of prices. It is something that the Bank should consider in its report. It should speak to and address the issue. Speaking as a humble aerospace and software engineer who has only read a few books, it is not within my gift to produce the research My next point is that this is a deliberate policy of manipulating asset prices, disrupting the price mechanism in the capital markets. Therefore, there will be a misallocation of capital. The Governor made a speech in New York at a monetary policy conference in which he acknowledged this phenomenon. I have tried to raise it further with him, but he is very good at moving the subject on. His speech was in defence of inflation targeting, and he dealt with four criticisms of it. The first was that price stability does not guarantee financial stability. He went on: "Second, the stronger critique of the Austrian school is that inflation targeting can actively feed the creation of financial vulnerabilities, especially in the presence of positive supply shocks… From the Austrian perspective, this misguided response"— the response of the central bank— "stokes excess money and credit creation, resulting in an intertemporal misallocation of capital and the accumulation of imbalances over time. These imbalances eventually implode, leading to crisis and ‘bad’ deflation." It cannot be said that the Governor of the Bank of England is unaware of the somewhat unfortunately titled Austrian school of economics, which I believe in and which tells us that money creation has real structural effects on the economy that affect people’s everyday lives. I was going to challenge the Bank to include in its report an assessment of these things, to demonstrate whether or not it was aware of these effects, but the Governor’s speech has shown us that the Bank is aware. It should not only show in its report that it is aware, but justify what the Governor went on to imply, which is that, by using other instruments, it could deal with these structural consequences. That is one of the big questions of our time: whether or not the structural consequences of easy monetary policy can be dealt with using its other instruments. I am absolutely convinced they cannot be dealt with, and therefore we will have a worse crisis later than the one in 2008 I sense that Mr Deputy Speaker would like me to wrap up, so I will just make the following point. This has gone from an exercise in saving the financial system to an exercise in kicking the can down the road. How will it develop in future? We have gone from low rates to QE, and I think we will go to negative rates. There has already been talk of banning cash. There have been discussions of helicopter money, too, and at the recent inflation report meeting, out of four people, only the Governor would rule out helicopter money. It is encouraging a misguided belief that if only we printed money and gave it to everybody, there would be justice. This kind of naive inflationism is madness.