25 Oct 2010

Darling calls for investigation into QE’s effects, before its expansion

As the Government tries to move the debate on from austerity to growth, a spanner in the works has emerged in the shape of new figures showing poor bank lending figures.

This shines a light on what I would say is the Government’s real short term growth strategy: allowing the Bank of England to create more money, so-called Quantitative Easing (QE), or QE2.

All of which begs the question: “What on earth has happened to the existing £200bn?” I happen to have written a 5,000 word epic on the subject for Prospect, which is too long for these pages. But the headlines are highly significant for the current debate.

The former Chancellor, Alistair Darling, has told me that he would not have automatically granted the Bank of England authority to extend its programme of QE beyond £200bn.

In this month’s Prospect magazine, Mr Darling raised serious questions about the scheme of Bank of England money creation that he pioneered and signed off in March 2009. He is rather candid about our ignorance.

“Nobody really knows what impact it’s having. Look at the Bank of England [monetary policy committee] minutes, even they are split.”

Though he still believes that the decision to launch QE was right, he told me that £200bn of QE was the right time to “take stock,” and that he was “concerned” about profiteering. So much so, that he would not have automatically granted the Bank an extension of the QE programme.

“Were I still Chancellor and the Bank came to see me again then I would want to see some assessment of what has happened,” says Darling.

“In the current climate I can’t see any problem with it being a public report. Where is this money? We need a treasury/bank of England evaluation as to where it is. Is it in circulation, or is it sitting in bank vaults?” he asks.

Perhaps this is easier to muse about when you have left office. In the article, I reflect that it was the idea that banks were making billions pounds in profiteering from QE that was the key argument used in negotiations over Labour’s bonus tax. There was also some tension between the Labour Treasury and the Bank of England over its precise implementation.

The Japanese economy specialist who invented the term ‘Quantitative Easing’, Richard Werner, has a very unexpected take.

He believes that the Bank of England, as the Bank of Japan before it, is not really carrying out QE at all, but almost standard central bank operation dressed up as something special in order to convince the country they are doing something.

Conversely, other economists tell me why it definitely is working – and why it definitely is not – alongside why it definitely will and won’t stoke an inflationary inferno.

A request from the Bank of England for more QE could come as soon as 4 November, and both George Osborne and David Cameron have already indicated that they would say “yes”.

The former Chancellor’s intervention, is therefore rather significant. These aren’t the words of a partisan opposition spokesman, but an interested and involved party, who seems genuinely concerned.

It would be far easier for the former Chancellor to simply assert that QE has been a raging success. An official answer both here and in the US to the question “is QE working?” would surely be helpful to everyone.