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Quantitative easing and the democratic deficit

Kaveh Pourvand, 24 July 2013

It is a strange subject that brings together the Marxist academic Radhika Desei and the libertarian, Spectator editor Fraser Nelson together in agreement. Both authors criticise the policy of quantitative easing (QE) that central banks on both sides of the Atlantic, including the Bank of England, have pursued since the financial crisis. The policy involves the central bank creating money and using it to purchase financial assets, usually government bonds. The hope is that financial institutions will invest the spare cash, kick-starting lending in the economy. The policy has been a key plank of British economic policy in recent years, which has resulted in over £375bn worth of cash being injected into the economy.

Falling Gold Coins

Both Nelson and Desei dislike QE for the same underlying reason: it benefits elites at the expense of the majority. Nelson says it is a regressive policy which benefits the wealthy who see the value of their assets go up while reducing the real incomes of the poor. Desei points out that giving out this cash to financial institutions simply relieves them ‘of their irresponsibly extended loans’. According to John Kay, there is a dearth of evidence that QE has even had any impact on the UK economy.  In similar vein, Kay fears that QE continues despite its impotence only because it benefits the influential financial services sector.

Where does this suspicion of the motives behind QE come from?

It is probably that the vast majority of voters don’t have the time or inclination to learn the ‘ins’ and ‘outs ’of monetary policy. It is certainly not going to be a big part of any election campaign. Nor is the phrase itself particularly inviting, which, as Kay puts it, ‘seems designed to discourage non-technical discussion’.  Ignorance on the part of the public creates scope for abuse. This is where the fear that QE is really a giveaway to well-connected interests come from.

It’s noteworthy that QE is not a policy of the government but the BOE, which only has indirect democratic accountability. This is not to say that central bank independence should be reversed. Nor is the purpose of this post to say that QE is a good or bad thing. But it does seem disconcerting that such a hugely significant element of economic policy making is not really understood by the public. This does seem to invite corruption by more knowledgeable insiders. ‘Solutions’ to this conundrum are not easy to come by.

One may be to call for civil society groups with specialist, financial knowledge to monitor the policies of institutions like the Bank of England and perhaps issue warnings when they are doing something wrong. That is, of course, easier said than done. A better one may be, as Simon Jenkins proposes, to give the QE cash direct to the people.

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