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  • Writer's pictureWilliam Webster

Solar panels and QE

On 12th July 2012 the Bank of England released a study on Quantitative Easing, (The Distributional Effects of Asset Purchases).  The paper, requested by the Treasury Committee concedes that QE has had a distributional effect benefiting wealth holders. It also points out: “Without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower..….” “By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth ……” You could be mistaken that the only thing required to solve the country’s problems was more QE. Can any organisation be seen to have an unbiased view? Or should some of the report be taken with a pinch of salt? The report takes a snap shot of QE. In my opinion this is misleading. It fails to mention what QE may lead to and this will have future costs and benefits. After all forward looking analysis is regularly used by proponents of QE. When interest rates are pushed well below their long term norm you can’t help but feel that QE may lead to some unforeseen consequences that could in the future haunt us. One such consequence is what I call the solar panel problem. In the summer a colleague kitted out his house with solar panels. He explained the expected lifetime saving to his electricity bill exceeded what he could get in a bank. (The project IRR exceeded his ISA rate). At the same time he acknowledged that solar panels weren’t very efficient and he was doing this because interest rates were derisory. He had decided to invest in something that normally he wouldn’t have touched. If you extend this to other aspects of the economy investment now seeks a home at rates that normally wouldn’t get financing for the levels of risk involved. House buyers pay reduced mortgage rates. Companies borrow at very low cost. Governments contemplate borrowing more because the funds are so cheap.  So far so good. Perhaps the only person who is worse off is the cash based saver. But hold on is it that simple? In normal times my colleague wouldn’t buy solar panels. But his action now has the direct effect of investment being made in something that normally would be considered unproductive. Is this good? Furthermore is it in the long run interest of the economy that uneconomic companies who would go out of business but for the unprecedented low interest rates continue to plod on? (Similar questions have been recently raised in the Sunday Press and by the venture capitalist Jon Moulton). Are we in danger of creating an economy condemned to low productivity, low growth and low wages? With the worst recession since the ‘30s is the surprising rise in employment (and fall in productivity) the first sign that QE has unintended consequences? However unpalatable markets are, deliberately altering prices by direct intervention leads to future difficulties whether they are ones of misallocation or inability to fool all the people all the time.  Therein lies the danger that the Bank at some future point can’t keep rates low leading to accelerated rates of insolvency and foreclosure. No wonder commercial banks won’t lend. This is serious stuff and I’m sure the Bank considers it. So why pronounce QE as a success when the experiment has much further to run?

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