Quantitative easing was a failure, whatever the Bank of England might say

The most effective way to convince the world that you've done a wonderful job is to get someone else to say it. If you shout it yourself, it lacks credibility. This basic public relations principle didn't stop the Bank of England from loudly declaring that quantitative was a resounding success. Well, they would say that wouldn't they?

Yesterday, the Bank of England issued its quarterly bulletin. In a predictable self serving way, the report claimed that quantitative easing boosted the level of GDP by 1.5-2 percent and added between ¾ and 1.5 percentage points to inflation. Quantitative easing was equivalent of 150-300 basis points cut in the bank rate. The Bank of England were selling the story that quantitative easing packed quite a punch.

Is it true? Even the article cautions that there is considerable uncertainty around these estimates and that the precise impact of quantitative easing is likely to vary according to circumstances.

Notwithstanding this warning, the BoE made great play of the effect of quantitative easing on government borrowing rates. It is true that government bond yields have not risen sharply. The UK  avoided the horrific bond market meltdown that ripped through the eurozone. It is also likely that the coalition's announcement of a medium-term fiscal plan also kept yields down. Disentangling the effects of cheap central bank support to the budget through bond purchases, coupled with a substantial hike in VAT rates is not easy.

The report says that quantitative easing was instrumental in supporting asset prices. Here, the Bank of England sails into murky waters. Quantitative easing had powerful redistributional implications that favoured the wealthy and punished the poor. Asset prices stabilised and then grew as the bank pumped out massive amounts of liquidity. At the same time, interest rates became sharply negative eroding the value of bank deposits. The house price correction was delayed, effectively denying many people on modest incomes the opportunity of buying a home at a reasonable price. Quantitative easing robbed deposit holders in order to enrich holders of equity and housing.

The Bank of England would probably retort by saying that this redistribution was justified because overall growth was enhanced. It is not an argument that survives serious scrutiny. Those that have borne the brunt of this recession has tended to be at the lower end of the income distribution. This is where unemployment struck hardest. This is where people keep large amounts of their wealth in cash rather than equity.

The Bank of England claims that consumer confidence improved once quantitative easing began. However, the data suggests otherwise.  From the moment the crisis began, consumer confidence tanked. Any recovery in household confidence was temporary, small, and coming off catastrophically low initial levels.  Over the last year or so, confidence levels have again started to decline alarmingly. This is borne out fully in the data for consumption growth, which has been feeble for at least four years.

Ultimately, QE was an ill-judged strategy that failed to resolve the UK's post-crisis difficulties. Growth remains weak, and the economy teeters on the edge of another recession. Inflation has surged, while unemployment has remained high. Asset prices are higher, but in a sense, that was always at the core of the UK's difficulties. Before the crisis, the UK had become a bubblized economy, and QE only exacerbated and delayed the inevitable adjustment. 

The economy remains a wreck. QE failed, it was always going to fail, and if the BoE tries it again, it will fail again.