On-going QE warped the price of houses and other real assets, widening wealth inequality in the UK and beyond. But it suited governments and powerful financial vested interest – and so it has carried on.
Which brings us to Saunders’ speech. Since it was founded in 1997, the MPC has featured some impressive “outside” members, who aren’t regular Bank of England employees. Kate Barker, the economist, and fund manager Sushil Wadhwani spring to mind. Saunders, too, is a talented “outsider”, formerly with Citibank, whose writings I respect and have followed for many years. This speech, too, should be widely read.
Saunders warns of “a very large and rapid decline in economic activity that is without precedent in recent times”. Tapping into Bank of England research, he reports “small firms are doing worse than large firms” and GDP from April to June could fall by 25pc quarter-on-quarter – “a far bigger decline than any previously recorded”.
We learn, ahead of official data, the UK jobless rate could already have surged “from 4pc to about 9pc” – and that’s before furloughing ends, a scheme covering well over a quarter of the workforce. While much of officialdom has pointed to a rapid “V-shaped” economic bounce-back, once the lockdown is eased, Saunders is more sanguine. He predicts companies “with complex global supply chains or which rely on a high degree of social contact … may need to totally rethink their business models”. He points to “major uncertainties … which mean many firms won’t be able to plan ahead with much confidence”.
Even if the virus is successfully contained, Saunders suggests, “the searing experience of such a dramatic drop in incomes, jobs and profits is likely to have lasting behavioural effects” across the economy. Having seen such dramatic economic swings, this MPC member suspects that “people’s expectations will put much more weight than previously on extreme downside possibilities”.
All this is entirely plausible – and Saunders is to be applauded for what, in my view, is a courageously realistic economic assessment. The problem I have is his preferred policy response. For, in Saunders’ view, the costs of policy error are “asymmetric”. He argues it “is safer to err on the side of easing somewhat too much … rather than ease too little”.
What we heard last week, from both Saunders and Andrew Bailey, the Bank governor in a more cryptic intervention, was an argument to take the UK down the road towards even more extreme monetary measures.
Interest rates are already 0.1pc, having been lowered twice in response to coronavirus. They could soon be yanked into negative territory – a move that further warps economic incentives and makes banks more fragile and prone to collapse. Monetary expansion is already happening at breakneck speed, yet our leading financial policymakers are arguing the virtual printing presses should be cranked up even more.