The banking world: a reply to the letter from nineteen academics
The author of the reply in the Financial Times, John Hearn, a senior lecturer at ifs University College, London, has a serious stake in maintaining the present system. IFS – originally the Institute of Bankers – was granted University College title by the Department for Business, Innovation and Skills (BIS). Those invited to lecture there include Peter Keenan, Head of Customer Propositions, HSBC; George Magnus, Senior Economic Advisor, UBS Investment Bank; and David Roberts, Deputy Chairman of Lloyds Banking Group. Not for the first time he stoutly defends the status quo against concerned and well-qualified critics.
John Hearn agrees with the first point the economists made (covered in our last post): “QE is an unreliable tool for boosting GDP or employment”:
“This is of course correct because despite inflated claims, QE can only ever have a secondary and tenuous effect on these variables”.
Mr Hearn states that the primary task of QE [as currently administered] is to achieve target inflation in its given currency. His hope is that stabilising the economy at target inflation will cause confidence to return, set the economy on a growth path and be more used efficiently as it spreads through the economy than if it is being controlled by well-meaning groups of civil servants or economists.
He disagrees with the Bank of England research published in 2012, showing that QE “benefits the well-off, who gain from increasing asset prices, much more than the poorest”:
“[T]he sustained impact on asset values is the impact of artificially low interest rates, which have the continuing and distorting effect that has produced current asset bubbles. These bubbles benefit certain groups in the economy such as investors and debtors, and damage savers”. The economists and the Bank of England research, he thinks, are confusing QE with badly managed interest rate policy when referring to asset prices.
Conventional versus constructive QE
As Hearn summarises: they assert that “QE is misdirected into financial markets, whereas it could have been used to “finance government spending (on infrastructure)” or used to make gratis payments “to each Eurozone citizen”.
So should governments persist with Hearn’s ‘conventional’ QE, which – as he writes – has had only “a limited and secondary impact on growth and employment”, or is it “time for the ECB and eurozone central banks to bypass the financial system and work with governments to inject newly created money directly into the real economy”.