Last week, to no fanfare whatsoever, the Treasury Committee released an extensive report on a set of policies the Bank of England has undertaken over the past few years. The report’s immediate focus was on the Bank’s recent Quantitative Tightening (QT) programme, which promotes higher interest rates. But read properly, it was an attempt to assess Britain’s central bank policy since 2008. QT, after all, was a direct attempt to unwind the Quantitative Easing (QE) programmes that were put in place in response to the financial crisis. To judge its effectiveness, the report had to look at the Bank’s monetary policies over the past 15 years. Suffice it to say it made for damning reading.

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Britain is facing a second 2008

By Philip Pilkington

In a capitalist economy, financial markets should have one job and one job only: the allocation of capital. They should look at various businesses and assess their viability. Those they assess as being viable should then access funding on good terms; those that are not viable should not.

But since the onset of QE, the City has largely become an arm of the Bank, constantly watching its every move for signals about what to do next. The reason for this is straightforward: the QE programmes have given the central bank almost total control over the government bond market, partial control over the corporate bond market, and a large degree of influence over stock prices. If you are an investor and you want to make money, the easiest way to do so is to guess what the Bank is going to do next.

There are, as a result, plenty of investment professionals consulted in the report, all of whom have firmly bought into the QE/QT framework. Each provides their own minor assessments: one will say QT is being undertaken too fast, another will say that it is being undertaken too slowly — and, at the end of the day, the Bank will fall somewhere in the middle. All very sensible, all very orderly. Until it isn’t.

In fact, what is so striking about these assessments is their lack of clarity. Beyond the fundamental virtue of the QE/QT framework, the only point that everyone agrees on is that they really have no way to know what is going on. The Bank, as the report makes clear, “is uncertain about the macroeconomic and money supply effects of QT”. Elsewhere, it notes that “the Bank is taking a ‘leap in the dark’ by embarking upon a major monetary operation without specifically and separately tracking its effects”. Indeed, at one point, the Governor himself admits this, explaining that such uncertainty is “why we keep QT under constant review”.

Of course, no policy undertaken by any government institution produces certain outcomes. But this, it’s worth spelling out, is the Bank of England, the very institution tasked with keeping the financial peace; indeed, its own independence rests on the pretence that they set monetary policy in line with scientific criteria. Instead, it’s been treating our economy like a roulette wheel — and one that will soon be stacked against us. As interest rates have risen, the value of gilts — government-issued bonds that are supposed to be low-risk — has fallen fast. You don’t need to be a finance whizz to understand what this gap represents: losses.

Indeed, these losses are shown clearly in the Committee’s report: “Annual losses in each of 2023 and 2024 will amount to £40 billion, eroding the cumulative £124 billion positive cashflow that was generated up until September 2022,” it states. Crucially, this doesn’t even take into account that these significant and rapid declines are dependent on optimistic forecasts of future inflation. If inflation remains stubbornly high or even rises again — say, on the back of ever-increasing geopolitical tensions — then the downturn will be even more significant. And who will pick up the bill? The Treasury and, via the Treasury, the taxpayer.

The Committee, understandably, were less than pleased with this: “Notwithstanding the operational independence of the monetary policy… it strikes us as highly anomalous that decisions have been and are being taken concerning huge sums of public money without any regard to the usual value-for-money requirements”. On the face of it, such an indictment surely calls for root and branch reform of the Bank of England. Its QE programmes of the past 15 years have been a disaster, turning would-be investors into dreary inflation-watchers. But beyond this, it has also wasted money — public money — and left the country effectively broke. The Bank of England knows this; it is, after all, what they told Liz Truss when she tried to force through tax cuts.

Yet while the Bank is more than happy to aim their budgetary fire at a sitting Prime Minister, they seem a lot more reluctant to address how much their own monetary policy experiments have cost the country. Amid today’s inflation news, politicians will gloat, the bankers will chatter, and the national press will lap it up. And missing from all this will be any mention of main driver of Britain’s economic woes: the Bank of England itself.

In the case of Britain’s bankers, I suspect not. After all, if the past year has taught us anything, it’s that they can provide something that the politicians will always want: money. 

There was a time when the function of a central bank was to regulate the wider banking system, set interest rates and keep inflation under control. Though an important role, it was a limited one.

But then, in 2008, the global banking system almost collapsed. The shock was such that slashing interest rates wasn’t enough to revive the economy. And so the central banks embarked upon a course of quantitative easing (QE) — i.e. creating money electronically and using it to buy up government debt and other financial assets.

This was meant to be a temporary measure. As soon as things went back to normal, the plan was to reverse the process of QE. The central banks would sell off the assets they’d purchased and electronically destroy the money they’d created. Job done; the balance restored.

But things didn’t go back to normal. By 2012, vast amounts of money had been created — £375 billion in the UK alone — but there was little sign of inflation and not much growth either. And so QE was never “unwound”. Politicians realised this was an endless fountain. In the wake of Brexit, the Bank of England conjured up enough funny money to buy a further £70 billion of government bonds.

Now with Covid, the QE binge has become an orgy. All the central banks are at it. In the UK, we’ve plucked another £450 billion from the magic money tree. To put it another way, our national debt now stands at over two trillion pounds, but getting on for half of that is owed to the Bank of England.

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Who will pay for this Covid catastrophe?

By Peter Franklin

It’s getting hard to deny that the central banks are printing money to finance government spending. The central bankers won’t admit to that, of course. They’ll say that QE is just the equivalent of an interest rate cut and intended to stop inflation from turning into deflation.

However, that alibi is wearing thin. Firstly, there’s not much risk of falling prices right now — quite the opposite in fact. And, secondly, one can’t help but notice that the more QE there is, the more the Government borrows.

But why worry? Isn’t owing money to the Bank of England better than borrowing it from the Chinese? And given the fragile state of the economy, isn’t borrowing preferable to tax hikes or spending cuts?

There is the risk of inflation, of course — a real concern right now. Then there’s the risk that the money markets might run out of patience — and start charging higher interest rates on government debt. When a government owes £2.2 trillion, like ours does, then every 1% increase in the interest it pays on that sum costs an extra £22 billion a year — or roughly half the defence budget. 

But there’s a more disturbing possibility: that economic gravity doesn’t reassert itself — and that the QE orgy continues.

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What if it's not the economy, Vince?

By James Kirkup

Ultimately, this would be terrible for democracy. When governments rely on their own citizens for money, they become beholden to them. The principle of “no taxation without representation” puts nations on a path to universal suffrage and keeps them there.

However, governments that get their cash from elsewhere — oil revenues for instance — can afford to ignore their people. As the absolute monarchies of the Middle East prove, “no representation without taxation” is also a potent political force. 

So what happens if central bankers replace taxpayers as the key source of government finance? We saw what happened in Greece, which ceased to be sovereign state as soon as it became dependent on the European Central Bank. The Greek people voted for a government of the populist Left, but extreme austerity was imposed anyway — and continues to this day. Similarly, Italy is controlled by the EU establishment — the Prime Minister is Mario Draghi: a former President of the European Central Bank.

In Britain, we can be thankful that Brexit has removed that possibility. But what’s the point of giving the Eurocrats the slip, if we replace them with a homegrown caste of over-mighty central bankers?

Take the Bank of England’s “net zero mandate”. The Old Lady of Threadneedle Street already interferes in the market by using QE money to buy up corporate bonds from the private sector. Purchases total £20 billion so far. This amounts to a major subsidy for the qualifying businesses — who are able to borrow more and at a lower cost. Deliberately skewing this to favoured companies would mean using QE to pick winners — a bizarre position in which to place a central bank.

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Do you know where money really comes from?

By Peter Franklin

I’m all in favour of green government policy. But these are decisions that should be made democratically in Parliament, not by unelected central bankers picking winners. 

Meanwhile, the central bankers could become more powerful yet if the Chancellor goes ahead with a scheme to introduce what he calls “Britcoin” — a digital currency overseen by the Bank of England. This could have all sorts of benefits — from reducing transaction costs to ensuring that our national currency isn’t displaced by a cryptocurrency or Facebook’s Diem system.

But there are dangers to Britcoin too. For instance, a digital currency administered by the Bank of England could be used to monitor our purchases and transfers, thus ending the privacy that comes with using cash. In theory, the Bank could also apply its climate mandate to our transactions — for instance, imposing a penalty on purchases deemed to be unsustainable. 

And then there’s the risk that a central bank digital currency (CBDC) would destabilise the banking system. 

At the time of the last financial crisis, governments moved fast to prevent bank runs. With a few exceptions, they succeeded. That said, their job was made easier by the fact that most of us don’t want to empty our accounts and store our savings as banknotes under the mattress. However, if we could withdraw our money in the form of digital cash and keep it in a safe with the Bank of England, that would present fewer obstacles. Conceivably, the entire private banking system could collapse within minutes if enough people went online to transfer their bank balances into their Britcoin accounts. 

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Covid-19 has exposed our financial fragility

By Jonathan Tepper

I’m presuming these possibilities will be anticipated, and preventative measures put in place before an official digital currency is launched, but there’s no doubt that any such move would further expand the role of the Bank of England. 

How can we stop this? Ideally, our elected representatives would be dealing with this stuff on our behalf. But I doubt that most of them are capable. The next time you meet a politician, ask him or her to explain quantitative easing to you. Or ask them where the money that banks lend to their customers comes from. If they say “from savers”, then they haven’t got a clue. 

If we can’t rely on our politicians to provide effective oversight, what can we do? One solution would be to end our addiction to QE — though I’m not convinced we’re willing to endure the austerity that would entail. Another would be to end the independence of central banks. But this would mean putting politicians in full charge of the QE printing press — and do we really want to risk that?

Unless there’s an inflation crisis that brings the whole pack of cards crashing down, the most likely scenario is that the central banks continue to grow in power — until we stop thinking of them as banks at all, and instead as parallel governments.