Firing line  

Vince Cable: None of us in government knew how QE would work

Vince Cable: None of us in government knew how QE would work

Advisers and clients looking at the present economic climate in Britain may be tempted by the view that a lot of chickens are coming home to roost.

Long-term issues around the unwinding of quantitative easing, exiting the EU, sluggish productivity and wage growth, and demographics have combined to place policymakers in a bind, while investors are forced to question long-held assumptions around portfolio construction, bond yields and inflation.

One individual who has been around since the conception of many of the received wisdoms that are being challenged is the former politician and professional economist Sir Vince Cable.

His career has taken him from advising African governments in the 1970s, to being a special adviser in a Labour government, and then secretary of state for business in the Conservative-Lib Dem coalition government from 2010-2015.

Although in his late 70s, he remains very active as an economist, holding academic positions at both the London School of Economics and Nottingham University, and has three different books coming out this year.

Of the present economic climate he is scathing of any plan to cut taxes unilaterally, saying of Conservative leadership candidate Liz Truss’s plans that: “If she thinks you can cut taxes without there being consequences, she is either economically illiterate or dishonest. I mean, one could cut VAT for example, and that would not be immediately inflationary, but the money would have to come from somewhere else.” 

One of the areas of public policy that most pre-occupies investors today is the unwinding of quantitative easing by central banks globally. This has reduced liquidity in markets, pushed bond yields up and impacted equity markets.

And many associate the policy of quantitative easing with the steep rises in asset prices, including house prices, over the past decade, even when economic growth itself was meagre.

Cable defends the policy, saying the extra liquidity it provided to the banking system was needed, and, “it was a policy that originated in Japan, and was taken up by Bernanke in the US, who had studied the great depression and thought this would prevent the financial crisis turning into another depression, and it did, and it was applied in the UK as well. But the side effects have been strong. I don’t think any of us in the government at that time knew what the impact of QE would be.”

He acknowledges that by causing asset prices to rise, inequality increased, but he says the response should have been wealth taxes. 

Cable says: “Myself and Adam Polson, who was on the Bank of England’s Monetary Policy Committee at this time, tried to get this addressed via the tax system. We also tried to change it so that, instead of just buying government bonds, the bank bought small business loans, as that would have eased credit conditions for them coming out of a recession. But Mervyn King, then governor of the Bank of England, would not do it as he felt it was too much intervention in the economy.”