Sunday, October 7, 2012

Liam Halligan: QE is 'oxygen-mask' for banks and 'counter-productive' for savers

In his Telegraph column, Liam Halligan nicely summarizes what is wrong with zero interest rate and quantitative easing policies and why we have these policies.
My long-held view, as regular readers will know, is that QE is deeply counter-productive. 
A "backdoor bail-out" for politically connected banks, this ridiculous and historically unprecedented policy will ultimately bring only higher inflation and much steeper future borrowing costs. Reducing what you owe your creditors via a combination of deliberately-created inflation and currency debasement seriously harms any sovereign borrowers' long-term reputation. 
Yet we are continually told that QE is "positive" and "growth-boosting", all of which is total nonsense. 
Yes, money-printing pumps up asset prices for a while and fuels another round of banker bonuses.
But for savers, non-financial businesses and the economy as a whole, it can only end in tears.  
Preservation of banker bonuses appears to be a goal of policymakers in the EU, UK and US regardless of the harm done to the real economy and society.
The reason we are implementing QE, despite its massive drawbacks, is that insolvent banks are using it as an oxygen mask. 
As the Bank of England's Andrew Haldane pointed out, zero interest rates and quantitative easing make it a lot cheaper for the banks to engage in forbearance and not recognize the losses on their bad debt exposures.
Politicians, meanwhile, want QE to continue to suppress gilt yields, so allowing them to keep talking tough about "austerity" while avoiding the really difficult fiscal decisions. 
So, despite the massive damage it is doing to pensioner incomes and this country's future reputation, QE has friends in high places. 
Part of what makes the Blob (aka politicians, financial regulators, bankers and their lobbyists) so effective is that it operates globally.
Many leading lights of the UK's economics profession have also given the Bank of England's "extraordinary measures" the thumbs-up. 
Then again, sucking up to the powerful, and providing intellectual alibis for expedient policies that were going to happen anyway, is what most economists do. In addition, the wages of many leading pro-QE dismal scientists are paid, directly or indirectly, by the banks that are using this grotesque policy as a form of life support.
Please re-read the highlighted text as Mr. Halligan has described how the Blob (aka the Financial, Regulatory and Academic Complex; FRAC) manages to use the names of prominent academic institutions as a halo around destructive policies.

Which policy sounds more trustworthy:  policy A supported by an economist at Harvard or policy B supported by an economist at a community college?  Without even knowing what the policy is policy A has a more favorable impression because of the association with Harvard.

So the question is "are there any Harvard economists who earn fees from the Blob?"  For starters, we have Larry Summers...
QE-supporters on the MPC and elsewhere who claim inflation is "subdued" should take a close look at these latest PMI numbers. In the manufacturing sector, the input price index rocketed in September from 48.8 to 57.5 – an almost unprecedented rate. Food prices, meanwhile, are elevated and commodity costs are stubbornly high. This month we'll also see utility price rises and the impact of large increases in university tuition fees. 
The UK is in the midst of the longest double-dip recession in history and inflation remains significantly above the Bank's 2pc target – as it has been for no less than 52 of the last 58 months. And that's while sterling remains firm and before fireworks in the Middle East cause an oil price spike. 
So don't let anyone tell you that UK inflation is "subdued", certainly no one who works for an insolvent bank or with the power to implement more QE.

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