24th August 2012
Shortly after the Bank released its report with the somewhat damp squib of a title "The Distributional Effects of Asset Purchases", the media machine whirred into motion. Soon a Guardian piece cropped up under the headline "Britain's richest 5% gained most from quantitative easing" while the Telegraph plumped for "Pensioners biggest winners from QE".
The burning question appeared to be whether this latest revelation was the news struggling pensioners across Britain had been waiting for, or another coup for the wealthy. Yet the reality is both attempts to spin the story towards reader biases revealed only the time pressures imposed on journalists to get the story out, and nothing by way of actual news.
Chris Dillow at Stumbling and Mumbling sums up the problem:
"The Bank of England's admission that QE disproportionately benefited the rich has attracted some criticism. This is mistaken. The Bank has done nothing wrong.
The finding that QE increased inequality is a statement of the bleeding obvious. QE has raised asset prices, and it is only the rich who have financial assets; the Bank estimates that the median household has gross financial wealth of only £1500. As Ben says, it is therefore no surprise that QE has increased inequality."
Yet in reporting the non-news news to their readers, these publications have added to the confusion surrounding the policy. Worse, they have shifted focus away from whether spending billions of pounds in this manner remains an effective answer to the economic problems faced by Britain.
Due to their blinkered approach a key line was left uncommented upon. In its discussion on the impact QE has had on the broader economy the Bank was forced to conceded that while the "effects of QE…appear economically significant" they remain "subject to considerable uncertainty".
In other words, the question that could have been asked is how much certainty is required over the effectiveness of a policy before you decide to spend an additional £50 billion more on it?
We have very good reason to ask this question. In June Adam Posen, a senior fellow at the Peterson Institute for International Economics who sits on the Bank's Monetary Policy Committee (MPC), admitted he had been "too optimistic" over the impact of the asset purchases.
He advocated a shift in policy away from the purchase of British government debt to private sector debt to allow for the "direct targeting of financial sector dysfunctions". His pleas, to date, appear to have fallen on deaf ears.
There are also more fundamental concerns. Of the five key transmission channels identified by the Bank – policy signalling effects; portfolio balance effects; liquidity premia effects; confidence; and bank lending – only the first of these appears to be targeted by the latest round of QE. As with all policy decisions, therefore, even extraordinary monetary policy is prone to the problem of diminishing returns.
As such although it is clear that the unprecedented collapse of lending markets between September 2008 and March 2009 required extraordinary action from policymakers, its initial successes do not mean that the policy can continue to provide anything more than a parachute for the economy. Even if, at best, it can help to slow the pace of decline, it cannot by itself provide the conditions for recovery and growth.
Perhaps, as Joe Brewer, founder and director of Cognitive Policy Works says – "With finance there's always going to be a lot of unintended media complicity due to a lack of understanding". If he is right, however, then we should be arguing a more profound point about whether the press coverage of these issues are now running counter to the public interest.
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