Simon English: QE isn't a runaway success, and we should be grateful

Click to follow
The Independent Online

Inventing money to chuck at banks in the vague hope that they'll do the right thing with it is over, Sir Mervyn King seemed to signal yesterday. The Bank of England is a mere £325bn into its quantitative easing experiment and hopefully that will be the end of it.

Not because his scheme hasn't worked, of course, but because it has precisely succeeded.

Inflation will be under control before long and interest rates will stay as low as a stumbling economy requires (he doesn't put it quite so directly; central bankers don't like to speak in English lest anyone get the right idea).

Let's assume the Governor is correct – he is more often than most, being a rare example of exactly the right person in exactly the right job.

Still, even if he is on the money, he has a runaway train problem.

The runaway train problem is this: The train is hurtling down the track towards five recklessly drunk people who are about to be killed.

You are on a bridge under which it will pass, and you can delay it by enough for the drunks to move away by dropping a heavy weight in front of it. As it happens, there is a very trusting, very fat man next to you. Your only way to avert disaster is to push him over the bridge on to the track, killing him to save five.

Do you proceed?

Philosophers and others with too much time on their hands have been mulling over this sort of thing for ages.

Sir Mervyn's runaway train is that even if QE does save the five on the track, the fat man – pensioners, savers – are being brutally mowed down.

Annuity rates are tragic. Savings returns are not much better.

QE is a transfer of wealth from the prudent to the drunk. But if Sir Mervyn hadn't put it in place, everyone might have suffered.

The point is that there are no "good" policies when it comes to the economy, merely ones that are the least bad available. QE could still turn around and bite Sir Merv and the rest of us in ways not yet foreseen.

One scenario bothering number crunchers in the City goes like this:

The QE money does exactly as the Bank of England intends. Interest rates stay low, the economy stays at least steady and the stock market keeps rallying.

People with big savings at big banks feel emboldened to move the money that is presently earning them nearly nothing in interest into riskier assets.

Deposits flow out of the banks. Suddenly their balance sheets look shaky again. In the meantime a new bubble builds, in commodities or shares or tulips.

A fresh crisis ensues. That train's just at the station.

Peep peep.