Press release


Wednesday 25 April 2012

QE is damaging growth, not helping it AS impact on older generations is being ignored.

Commenting on today’s announcement that the UK economy has endured a ‘double dip’ recession Dr Ros Altmann, Saga Director General said:
“This is further evidence of the Bank of England’s failed Quantitative Easing policy.  QE was designed to boost growth, yet despite the Bank’s £325billion gilt-buying spree, the economy is not recovering, bank lending is not rising and banks are raising their overdraft and credit card lending rates.  How much more evidence is needed that this is the wrong policy?
Buying gilts has not created growth and has undermined UK pensions. Desperate banks are tightening lending conditions, while increasing their profit margins, so money is merely getting stuck in the system.  The Bank seems to be in complete denial of these negative impacts which have lead to a sharp rise in pension fund liabilities and sharp fall in annuity incomes, leaving those approaching retirement with minimal financial prospects. 
QE has also caused inflation, which, coupled with low interest rates, has sapped consumer confidence and hit older generations particularly hard.  It is the over 50s who have the money to spend, but they have been cutting back because of economic fear. 
These latest figures should be a wake-up call to policymakers, to highlight that the current stance of policy is not working well enough and we need to find more creative ways to stimulate growth.  There are routes available, especially if we can harness the power of pension assets rather than relying on the banking system.  We also need to understand the importance of the spending power of older generations – rather than taking money away from them, either via low interest rates or high inflation, we should be ensuring they remain confident enough to spend.
It is time to finally recognise that QE gilt-buying has not worked.  It was an experiment – and it has failed.  Relying on the argument that things would have been much worse without it, is no longer sufficient justification.”


Listing the alternatives available in order to boost the economy, Dr Ros Altmann outlines the following options:
What should we do to boost the economy then?  Firstly, we must recognise that QE gilt-buying has not worked.  Secondly, of course, the markets are ‘hooked’ at the moment on the fix of continued Bank of England buying so the ending of QE must be handled carefully.  A sudden announcement that no more gilts will be bought would lead to a sharp rise in gilt yields.  It is clear that current gilt yields do not reflect the fundamentals of the UK economy!  Our inflation and fiscal deficit levels would imply far higher yields.

Temporary fiscal boost for corporate investment.  Announcing a one year or two year special tax allowance for companies that undertake major capital investment would help kick-start growth.  Large companies have huge cash reserves, but are fearful of investing at the moment.  If they have a reason to invest now, rather than putting things off for the future, then we can help boost jobs and growth.

Harness the power of pension fund assets to boost growth directly.  This requires an alternative approach to policy.  Conventional fiscal and monetary policy are not enough, and we do need to spend more on infrastructure and long-term projects.  Government cannot fund this, but it could underwrite the returns. Such guarantees would be worthwhile because of the short-term boost to jobs, that would save money on benefit payments.  Both public (local authority) and private sector pension funds have billions of pounds worth of assets, which are currently considering buying gilts.  This would not solve our pension fund problems and would not boost the economy!  Instead of this, Government needs to act much more quickly to ensure these pension assets are committed to long-term investment projects to boost the economy, underpinned by some Government guarantee if necessary.

Consider using one of the partly owned banks to lend directly in the social interest – current lending targets are inappropriate: Taxpayers own most of RBS and Lloyds, yet those banks are being run to make profits for shareholders as soon as possible, which is not in the social interest.  We need the big banks to lend to small firms directly, because conventional banking is not working.  Small firms need access to loans on decent terms – that means reasonable charges and interest rates, without hidden fees and draconian conditions.  Banks are refusing to do this in too many cases.  Either the banks should be directed to do this, in order to achieve the social goals of growth and job creation, or the state must organise a lending institution to do this directly.  That is a far better use of money than buying gilts.  Currently, banks are being asked to fulfil gross lending targets.  This is not an appropriate goal – and even then they are not meeting their targets!  The small loan scheme only subsidises the interest rates charged, without looking at what those rates are, nor the other conditions imposed by banks on lenders.

Encourage lenders to take equity stakes in homes of those who have over-borrowed instead of repossessing:  A big fear for policymakers is that if interest rates rise, people with mortgages and negative equity may have their homes repossessed.  This would damage economic and social prospects.  However, we must not hold the rest of the economy to ransom to artificially support one group.  It would be better to recognise that some people have borrowed far too much, that they cannot repay their mortgage and that it is worth more than their house.  Therefore, we need to find ways to restructure these debts.  A sensible way forward would be for the lender to take an equity stake in the property, rather than forcing the borrower out and trying to sell.  This means that families could stay in their homes but would only own, say, 60% of it rather than 100%, but could carry on living there and their mortgage payments would constitute part ‘rent’.  House prices are too high, if they do fall that can correct some of the other imbalances in our economy.