Business News

Quantitative Easing hits the poor

Published 7 February 2013

The poor have been hardest hit by the Government's policy of Quantitative Easing (QE), according to a leading Brighton academic.

Professor Phil Haynes, professor of public policy and head of the University of Brighton's School of Applied Social Science, was giving evidence to a House of Commons Treasury Select Committee which currently is examining the effects of QE – or buying financial assets from banks and injecting more money into the economy.

The aim of QE, he said, was to stimulate the economy by increasing spending while keeping interest rates low. But even with the Government spending £275 billion from 2009 to 2011 on buying assets, the inflation rate still exceeded the Bank of England's two per cent inflation target. And spending recovered by only one per cent.

This, he said, was at a time of falling incomes for many households. QE boosted equity prices by an average of 20 per cent but only wealthier households who own these investments benefited. Rising inflation, meanwhile, has had a disproportion effect on the poor who spend a greater percentage of their income on consumer goods like food and fuel.

Professor Haynes said: "Higher than planned inflation has strong negative consequences at a time when real incomes are falling. Evidence is that with prices rising faster than income, this increases total debt for poorer households. Poorer households do not enjoy the lower debt costs associated with QE because of being at a high risk of default and having minimal assets as credit security.

"QE may have prevented further price falls in some parts of the property market, but there is little evidence this has helped poorer sections of the population, especially where they are dependent on the private rented sector. In many areas rents have increased."

And there were concerns, he said, that much of the new liquidity created with QE has, in fact, been invested abroad and has not assisted investment in the UK.
Professor Haynes said: "House prices and rents remain high as a proportion of income when compared with other developed nations and are symptomatic of a debt-based money system where unregulated banks inflate property prices via lending against preferred property assets.

"Banks perceive property investment as a lower risk than business innovation. Rents in London have continued to increase at a time of falling incomes and this also creates concern about the large amount of housing benefit rent subsidy that the Government has to pay to private landlords.

"Preventing housing asset inflation and the resulting economic and social instabilities should be a core aim of monetary policy which should aim to target credit at productive investment: small and medium size businesses, public works, energy, transport - and social housing programmes that will deliver fair and reasonable rents.

Professor Haynes, who has written a book 'Public Policy beyond the Financial Crisis' which evaluates "the failures of public policy in the half decade before the crisis", recommended to the committee: "Monetary policy needs a more holistic breadth of aims and objectives that takes seriously the social costs and benefits of different approaches to regulation and management of the money supply, this rather than just crude inflation targets that are based on the Consumer Price Index indicator.

"Inflation targeting in isolation from other policy has been shown to be dysfunctional and a poorly conceived performance strategy for managing a system as complex as the UK economy. Before the crisis it failed to prevent asset bubbles and associated instability. The Bank of England must be more proactive in the management of the supply of credit in the public interest.

"The Bank of England Monetary Policy must be more accountable and innovative, and take a more direct role in allocating credit in the public interest."