This is an interesting little observation by our favourite retired accountant from Wandsworth.
Quantitative easing has indeed meant that gilts prices have risen (yields fallen, same thing). It\’s even possible that banks have been the major beneficaries of this. For the BoE buys the gilts from the banks, and old gilts will have been bought at above par values (for yields have gone down, prices on older yields must be above par).
It was in this way that the banks profited enormously from quantitative easing. Because the government was, effectively, forcing the price of gilts up by pushing the interest rate down in pursuit of its monetary policy the bank , without having to take any action or initiative of their own, make a profit.
How much profit that was is hard to guess at. It would be invaluable if research was undertaken to establish this. But I suspect that a significant part of the £199 billion of spending on QE was turned, almost immediately into profit by UK based banks. It is this fact, and nothing else, that restored bank profitability and bank bonuses in 2009.
It\’s an interesting supposition, certainly.
I believe QE can work. But QE1 was captured by the banks.
That’s why QE2 has to be different.
So, is there in fact any research about what did happen?
Umm, yes, there is.
Over the 12 months to June 2009, banks increased their aggregate holdings in gilts from a slight negative holding to £120 billion. This is mainly due to additional requirements introduced by the FSA in 2009. UK banks are now required to strengthen their liquidity buffers by holding more assets that are high quality and have high liquidity.
Ah. So the banks have been net buyers of gilts then, not net sellers. So, no, QE hasn\’t all disappeared into the profits of UK based banks.
Another of Richard\’s suppositions destroyed by those pesky and inconvenient facts then.
Ritchie is, of course, writing a report on this. Be interesting to see if this misunderstanding still stands in it, won\’t it?