£50,000,000,000 is a lot of money. Yesterday taxpayers were told they would spending that much on buying up some more financial instruments to help the banking system.
£50,000,000,000 is more than this year’s departmental spending on “children schools and families”. It is considerably more than the Transport, Home Office, FCO, International development,Energy and Climate Change, Business, Environment and Culture and Media and Sport budgets put together (Budget book p 241). Parliament exists to vote on spending and to cross examine Ministers about their priorities with our money. It is there to question them on the efficacy of their spending. Yesterday we remained locked out from Parliament, which remained silent as this money was announced.
The public witnessed a contradictory presentation of the extra spending. A junior Treasury Minister fielded media interviews, telling us that this was a decision of the Bank of England. If it were truly a decision of the Bank, why then didn’t a Bank spokesman come on to explain it? The Minister was of course not telling us the truth. The Bank only had permission to spend an extra £25 billion. All quantitative easing money has to be approved by Ministers, who should therefore have the courage of their convictions and do the job of explaining and defending it.
The Chancellor himself must have been involved in the decision. He needed to sign a letter authorising an extra £25,000,000,000 of quantitative easing. He had personally authorised the first £150,000,000,000 and had told Parliament about it after the event.
The media interviews I saw failed to ask the important questions about this policy. Had Parliament been engaged we could have asked the following:
1. Why have you changed your mind about much quantitative easing is needed?
2. How long should we allow for QE to work? Aren’t there lags?
3. Why hasn’t QE led to more lending as the Bank at first implied it would?
4. Why does the FSA demand banks be more cautious and lend less when you want them to lend more?
5. Do you now have a money supply target? If so, what is it? If not, what is QE all about?
6.Why are you sure this has no inflationary consequences? For how long do you expect inflation to be below target?
7. How will you bring QE to an end?
8. What do you think will happen to interest rates on mortgages and loans to companies when you start selling off all these bonds taxpayers have bought?
9. Doesn’t requiring the Bank to be pessimistic about our prospects to justify this extra spending undermine the green shoots?
10. Is buying bank shares, dodgy loans and bonds the biggest poison pill ever bequeathed to a new government?
Yesterday the government must have been fully involved in this important decision. The immediate consequence was to cause the Bank to issue gloomy spin, offsetting several weeks of bullish spin which was talking things up. We need a clear explanation of why they are doing this and how they will judge its success. If they are now conventional monetarists, they should set a monetary target and seek to hit it. If they looked as if they knew what they were doing it would help instil more confidence more quickly.