The dynamics of QE have set the Bank of England on an unintended journey
SINCE the financial crisis, the Bank of England has made use of some highly controversial monetary policy measures to help the UK economy recover. The most recent was the chancellor’s decision to claw back £35bn of the interest payments the Bank of England made from its holdings of government bonds. This took several economists by surprise, and demonstrated a slight change in the way quantitative easing (QE) is being conducted. It brought the Bank that bit closer to directly monetising government debt.
But this just reflects the way that the aims and scope of the QE facility have shifted while it has been in use. And these shifting aims have opened the door to lots of other sorts of easing – like credit easing under Funding for Lending, or qualitative easing. What began as a plan to buy high quality private debt has morphed in response to subsequent events. Both the Fed and the Bank of England are conducting very different programmes to the ones they initially intended.
We are experiencing what the economist Ludwig von Mises referred to as “the dynamics of intervention”. An initial policy decision may appear wise, but if it fails to work then it is modified. This can make things even worse. There is a danger that we enter a vicious cycle, where the failure of one intervention begets another, and the result is an outcome that was never intended at the start.
A similar phenomenon took place for my wife during childbirth. The natural way to give birth is in a calm and safe environment (like a home), with a medical expert on hand to provide assistance. But when my wife recently went into labour with our second child, we were forced to go into hospital. The first intervention was a fetal heart rate monitor, which was reassuring but which restricts the mother’s movement. The second was a drip to reduce discomfort, but which again reduced my wife’s movement. Partly as a result of this, labour became more painful and an epidural was required – injected directly into the spine. The cumulative effect of all of this was that the decision to go to hospital ultimately led to an emergency blood transfusion in an operating theatre.
The argument is not that interventions are always bad. A small minority of home births end in a tragedy that may have been preventable with better medical equipment. Modern medicine is a marvel and hospital staff do a fantastic job.
But whether it’s monetary policy or childbirth, you need to look at the long game. A narrow focus on marginal interventions can obstruct the bigger picture. Decisions we make can put us on a path that is almost impossible to turn back from. Advocates of intervention would do a better job of selling it to sceptics if they confronted this point, and spelled out the downside risks.
There is a dynamic of intervention. Each decision can seem small in isolation, but inevitably leads to further action. What starts as pain relief can soon go much further.
Anthony J. Evans is associate professor of economics at ESCP Europe Business School. www.anthonyjevans.com, @anthonyjevans