CFI Annual Debate 2013

The Centre for Finance and Investment’s 4th Annual Debate was a joint event with the Chartered Financial Analyst (CFA) Society. It took place on 8 October and examined whether Quantitative Easing (QE) had been a mistake, asking: “What Now for QE?”.

Practitioners from the Edinburgh financial community, academics and postgraduate students made up the audience, and the speakers were: Professor David Cobham, Chair in Economics at Heriot-Watt, Professor Robin Angus, Executive Director of Personal Assets Trust, Russell Napier, consultant with brokers CLSA, and Bill Jamieson, former Executive Editor of The Scotsman.

David Cobham said there was widespread agreement among economists that QE helped to prevent a much worse recession, as well as helping to ease the situation in the banking sector. He estimated that without QE, nominal GDP growth could have fallen to -5% or even -12%. There was also agreement, more or less, among economists that the recent high inflation was not driven by monetary growth. But more recent evidence suggests that later rounds of QE are having less effect. So QE was necessary in response to the financial crisis but is no longer sufficient.

Robin Angus then set out the opposing view. While conceding that QE may have been helpful at the beginning “to stabilise the patient”, taken as a whole, he argued, it doesn’t work; it distorts capital allocation and transfers wealth to the wrong people, those who don’t need it; it delays recovery which, in the natural order of things, would happen anyway; and, maybe worst of all, there’s no obvious exit without negatively affecting the market. We should have let nature, and the Austrian School, take their course.

Russell Napier argued that the new normal was “credit control not money control” and stressed the irrelevance of QE and bank reserves in money creation. The Financial Policy Committee’s role is to prevent credit growing faster than GDP and thus QE “money” can’t be used. The Bank of England balance sheet will not shrink but it will control bank credit, thus money. He argued that it was like “capitalism with Chinese characteristics” and that inflation is a social choice, not due to QE.

Bill Jamieson said that, four years on from its inception, we have not even begun the process of scaling down or “tapering”. The merest hint that QE might be scaled down was sufficient to trigger widespread falls across global markets. Only when tapering is not just launched but successfully concluded can we begin to assess whether it has been a success. The US Federal Reserve is now effectively imprisoned by QE as it cannot find an exit that does not involve a significant risk of market dislocation. He also warned of the effect QE has had on widening income and wealth inequality.

A Q&A session followed and Haig Bathgate, Chair of the CFA UK Scottish Committee, made the closing remarks. He commented that we are in uncharted territory and, in truth, no one quite knows what the outcome will be – that includes the central bankers as evidenced by the U-turn from Ben Bernanke just a few weeks ago. It’s hard to believe that the economy is not in a better place than it would have been without QE. The question is whether some other kind of intervention would have been more appropriate and had a bigger impact (funding for lending etc.).