FT letter – QE increases risks for all assets

by Dr. Ros Altmann

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Sir

Charles Goodhart is absolutely right to insist that Quantitative Easing should be paused (Letters Dec 9th). He rightly stresses that central banks must not allow yet another financial bubble to inflate, because the bursting of the last one cost taxpayers vast sums. However, what he and other commentators do not seem to have recognised, is that QE itself has created a new financial bubble. Gilts are supposed to be the safest of assets, which other securities are priced off, yet the authorities’ actions have undermined that safety. By artificially inflating gilt prices, all other financial asset prices are distorted. When the mind-boggling billions are no longer being purchased and are offered for sale alongside the billions required to finance ongoing fiscal deficits, the sharp fall in gilt prices risks renewed asset price crashes. Buying gilts in vast quantities may seem sensible short-term but, apart from the significant damage to pensions, will cost taxpayers heavily in higher financing in years to come.

In any event, buying gilts does not necessarily stimulate the economy, as sellers of gilts will not plough money into the smaller company sector where it is so desperately needed and the banks are failing to fill this function too. We need a State banking institution for small businesses, as called for by Andrew Hill (December 9th), with much higher seed funding. That would be a much wiser way to spend taxpayers’ money than relying on banks to operate in the social interest.

Yours faithfully,

Dr. Ros Altmann
London School of Economics