David Miles on the economy, QE, banks and Help to Buy
If you were asked to pick three of the main economic talking points of the present day, you might reasonably choose the following: the threat of recession; the question of how to cleanse the banks and the issue of how to sort out the housing market.
There are few policymakers who have a unique insight on all three of them, but David Miles is one such man. As a member of the Monetary Policy Committee, he actually has a say on how much stimulus the economy needs at any one time (and indeed has recently been voting for more Quantitative Easing in recent months). As a former employee of Morgan Stanley, he has taken a close interest in how to resolve the inherent deformities of the banking system, and has suggested that banks should hold significantly more capital – perhaps even double the amount they are currently compelled to have. And as an expert on the mortgage market and former adviser to Gordon Brown on this topic, he knows more than almost anyone else about how to reform it to cure the housing market’s problems.
This morning we at Sky News had an extensive interview with Dr Miles. The news story is up on the Sky News website and the extended highlights of the interview are on the Sky News iPad app and will be on the Jeff Randall Live show tonight, but here are a few of the key elements (the stuff in bold and italics is me, the bits below are direct quotes from Miles):
Growth has been “extremely low”; in economic terms “It’s a difficult situation we start from”
Whether or not GDP falls by 0.1% or rises is not the difference between disaster and success for the economy. The big issue is: are we going to see a return to something more normal in growth terms? And growth has been extremely low. The outlook is not for a rapid pick-up in growth. At the same time inflation is uncomfortably above the target level. We are on the wrong side of the target still. It’s a difficult situation we start from, no question.
The growth outlook remains troubling and rather weak.
We need a “very, very expansionary monetary policy”
I think it is much more likely than not that the inflation rate will gradually move back down towards the target level. But it does so in an environment where growth remains very weak. That’s why I think it makes sense for us to assess where the trajectory of inflation is likely to be – downwards – and to set monetary policy in a way consistent with inflation coming back to the target but also to support growth. And I think at the moment that implies having a very, very expansionary monetary policy.
“Evidence is not compelling that the strength of [QE] is identical to what it was [in 2009]”
I think the mechanisms through which QE works remain similar to what they were in the past. That mechanism is still in place. Whether it’s exactly as strong as it was in 2009 is a bit difficult to judge – we are in uncharted territory – and the evidence is not compelling that the strength of the mechanism is identical to what it was then. But to me it’s clear that more asset purchases are a way of making monetary policy more expansionary.
Bank of England’s new remit is a “clarification” not a revolution
It’s a clarification about the flexibility that has always existed in the remit. I think the requirement to explain better and to focus more upon the trade-offs in bringing inflation back to the target is not insignificant. The changes are helpful but they also reflect the fact that there are great advantages [to the existing flexible inflation targeting remit].
British banks need more capital, but claiming this will mean they have less to lend out “makes very little economic sense”.
Those people who seem to believe that banks using more equity capital and less debt must hold back growth are putting far too much emphasis on what is a mistaken analysis. There is a view – you hear it quite often in the media, you hear many senior bankers espouse the view – that somehow having banks using more equity capital is detrimental to lending, is sucking money out of the economy; that it’s money that has to be put aside, that a bank can’t use in the economy – a pot that sits in the corner.
That makes very little economic sense. When a bank is asked to use more equity funding it has more money to lend – not less.
I don’t think it’s an accident that those banks which have had their capital position move to a weaker position are the ones which have the weakest lending.
So it’s actually quite the opposite of what has become the conventional wisdom.
The economics of it don’t quite add up.
Government’s Help to Buy scheme (guaranteeing mortgage lending) “doesn’t make much sense as a long term structure”
Having the government offer mortgage guarantees now and in perpetuity doesn’t make much sense and I’m sure that is not the intention of the scheme.
I would make the general point that one needs to draw a distinction between policies brought in in an unusually difficult economic environment, and policies which are brought in to change the economic framework
On whether Help to Buy could become a kind of British Fannie Mae:
I’m sure that’s not the government’s intention and it would be pretty undesirable if that’s the way it went.