It looked recently as if US and UK economic policy would kick the habit of recent years’ quantitative easing (QE) and rock bottom interest rates. We will now have to wait longer for that, as economic forecasts dim around the world. But spending time in London, you could be forgiven for wondering whether there were ever any economic worries – on one estimate, you need to earn over £100,000 to buy a first property, while the numbers working in the City, who might have a chance of doing that, are now higher than before the credit crunch.
There is a direct connection though. There is no better measure of the impact of QE than London property prices.
QE, cloaked in the language of ‘needs must’, is rarely debated and rarely disputed by the main Westminster political parties. Whether it has worked is hard to judge, because we won’t know what the hypothetical alternative, a far tougher, harder correction in economic terms, would have led to. But we do know that it hasn’t worked in the way that was intended.
What is QE? QE is the creation of a new, multi-billion dollar cheque book by central banks, which is used to purchase government bonds and other assets from banks and other financial institutions. The new money is then lent to companies or consumers in the real economy, boosting economic activity and confidence. The central bank creates the money, not by printing but as an electronic account, which it uses in this way.
This has been an extraordinary injection of capital into the economy, over £375bn from the Bank of England into the UK economy in several tranches. But it did not work in the way it was expected to. Very little of the money left financial institutions, particularly in the early years. The banks used it to shore up their balance sheets, rather than lending, or investing instead in other assets that offered more of a yield, given the low cost of borrowing. The wash of money into government bonds and then equities in developed markets served to depress those yields, triggering a hunt then for riskier investments.
This did over time help to restore confidence. The rise in stock market prices fed through into pensions and investment benefits, while the property market, focused initially on London, saw significant price rises.