Joining William White, BoE's Spencer Dale says QE 'could harm the economy'

Prior to the 2012 Jackson Hole conference, William White published a paper on monetary policy and unintended consequences.  Now, the Bank of England's chief economist, Spencer Dale, is warning about the dangers of Quantitative Easing.

As reported by the Telegraph,

Speaking at Trinity College, Dublin, Spencer Dale warned that more quantitative easing (QE) could store up problems for the future without solving current ones. 

How effective it was as a policy depended on what had caused the economic weakness, he said, giving the example that simply pressing on the accelerator did not do much good to a car if the handbrake was on. 

If the problems were misdiagnosed, rather than boosting growth, QE might just lead to higher inflation, he added....

In his speech, Mr Dale said economists should not assume QE was a benign policy option. “Prolonged and aggressive monetary accommodation, combined with increasingly unconventional policy tools, also comes with potential costs and risks,” he said.

Regular readers know that since the beginning of the financial crisis, your humble blogger has said that we are dealing with a bank solvency crisis.  The monetary policy toolbox does not contain tools that are appropriate for fixing this type of crisis.

After 2+ decades of trying different monetary policy tools like zero interest rate policies and Quantitative Easing, Japan has just admitted that they do not work to address the problems created by a bank solvency crisis.

The only way to successfully address a bank solvency crisis is through adoption of the Swedish model and requiring the banks to absorb the losses on the excess debt in the financial system today.

Iceland did this at the beginning of the current global financial crisis and the bank solvency crisis is now behind them.

Mr. Dale offered up several potential unintended consequences of QE.

Aside from the risk of rising inflation, he said, low rates and QE may be encouraging investors to shift “their portfolios towards increasingly risky assets”. “This … could store up problems for the future,” he added. 

Accommodative monetary policy may also be damaging Britain’s long-term potential by allowing “inefficient firms [to] remain in business for longer and so slow the reallocation of capital and labour to more productive uses”.

Your humble blogger has talked about this frequently using the terms 'zombie' companies or 'zombie' loans.  In both cases, damage is done to the real economy as inefficient firms or borrowers are allowed to tie up assets and slow down the reallocation of assets and capital to more productive uses.

“Monetary policy should provide short-term support in times of need, but it must avoid becoming a long-term crutch obstructing the required rebalancing of our economy,” Mr Dale said. 

He also warned that eventually unwinding QE and selling off the gilts would be a delicate task that risked unsettling the government bond market. 

“Beware confident economists,” he said.

The highlighted text is a point worth remembering.