The Treasury has put billions of pounds of taxpayer money at risk by sticking state guarantees on “a series of expensive experiments” that it does not fully understand, an influential group of MPs has warned.
The Public Accounts Committee (PAC) claimed the Chancellor’s department does not have any clear goals for either the Bank of England’s £375bn quantitative easing (QE) programme or its £80bn Funding for Lending scheme (FLS), both of which are backed by the taxpayer, and had no means of monitoring their progress.
Margaret Hodge, chair of the committee, said: “The Treasury has not convinced us it understands either the risks it has taken on by indemnifying the Bank against losses on QE or the expected economic benefits... The Treasury seems to be embarking on a series of expensive experiments, indemnified with taxpayers’ money.”Experiments that are likely to end badly. After all, if these monetary policy experiments worked, why isn't Japan, which has implemented these policies, experiencing tremendous economic growth?
The Treasury has resorted to providing guarantees and indemnities in an attempt to drive the recovery without increasing public borrowing. However, such “contingent liabilities” carry a risk of loss as the state has pledged to bear some or all of the downside.
With QE, the taxpayer has fully indemnified the Bank. Under the FLS, high street lenders can swap risky bundles of loans for low-risk Treasury bills. Both schemes were designed to help boost growth, but carry the potential for losses.....
Giving evidence to the committee in October, Sir Nicholas Macpherson, the Treasury’s Permanent Secretary, described QE as “an experiment, and we won’t know the ultimate answer for many years”. Although the scheme was in profit in 2011/2012, he warned that there was a risk of losses from QE.
“At some point interest rates will start rising... and at that point you could sustain quite big losses. My guess is that it will all wash out in the end, “ he said....The size of the losses should the central banks try to resell the bonds they bought under quantitative easing will be orders of magnitude larger than the interest income generate on the bonds.
Fortunately, because central banks have zero "cost" to carry the bonds, they can hold the bonds to maturity and never realize the loss. Of course, this assumes that the central banks have other ways of reducing the money supply that don't cost money.
In the US, Chairman Bernanke has continued to say that the Fed won't have to sell, it can manage the money supply by paying more interest on the excess reserves in the banking system and therefore control the potential inflationary impact of these reserves. The problem with this is that it effectively recognizes the losses on the bonds purchased under QE (the alternative to paying interest is to sell the bonds and reduce reserves that way).
The PAC urged the Treasury to “provide more transparency on what QE is seeking to achieve”, and to work with the Bank to “understand and publish data on the effects and benefits of the measure”.The very last thing that the central banks want to do is provide more transparency on what QE is seeking to achieve and publish data on its effects and benefits.
Doing so will highlight that QE and its related zero interest rate policies are creating an economic headwind (recall the Retirement Plan Death Spiral) that is causing both consumer and business demand to shrink.
The conclusion will be that these economic experiments in monetary policy, while shown to be very effective by the central banks' models that didn't predict the financial crisis, are a real world disaster.