Shall we tell them or not?

The problem with this idea that is:

The trouble is, as Paul Mason has noted, no one knows if QE1 worked, so what’s the chance of QE2 doing so? In my opinion, not high unless the UK approach is radically transformed. I don’t want to premeditate the forthcoming Green New Deal publication on this issue. Suffice to say that if the UK could put £200 billion into the economy last time – a sum captured almost entirely as it transpired in bank balance sheets, profits and stock market and asset price inflation then this time it needs to do something very different. This time it needs to spend the money straight into the economy and cut out the middle man called the banks.

Do that – do qualitative easing as I might call it and not quantitative easing – and then we have a chance of using such funds properly.

I can see a couple at least…….

24 thoughts on “Shall we tell them or not?”

  1. How about:

    ‘cut out the middleman called government and give us a tax cut – starting with the less well off’

    And your reference earlier today to the KPMG research that suggest it is not sitting with the banks.

  2. Am I imagining things, or do too many people write about QE as if the money is “given” to the banks? What does RM mean by “captured” by the banks. He does realize that for the banks to get £200bn cash they have to hand over £200bn of assets doesn’t he? Of course they do benefit, from higher bond prices, but it’s not as if they’re £200bn better off from the transaction, which is what it sometimes sounds like people think.

    So is RM saying that the £200bn stays as cash within the bank’s assets portfolio? Possibly so – there does seem to be a baffling quantity of cash being kept in reserve by banks at central banks. If the banks then took the £200bn of cash and went and bought assets – including government bonds from non-bank owners – that would release cash into the economy and as this cash is redeposited with banks we’d get the traditional money multiplier working. But the money supply isn’t rising so quickly.

    If anybody can tell me why the banks are holding the cash (if indeed they are) I’d be grateful, especially if the answer comes with a linked citation.

  3. Can’t see the problem with spending the money
    straight into the economy (which it sounds like the Green New Deal is going to suggest: they have suggested it before.)
    If you are concerned that the banks are so dodgy in lending practices that they have to be compelled to hold such large reserves they have less to lend,then spending Government created money straight into the economy sounds logical.
    A tad unorthodox maybe. If Lincoln could avoid borrowing off the banks to pay for the Union Army in similar fashion ,we can pay for the public services with the same unbacked cheques that the gov sends to the banks for QE.

  4. Luis,

    The banks are holding the cash because they can’t do anything else with it. Remember, aggregate reserves are not used up during the settlement process but are merely moved around the banking sector. Only the BoE can increase or decrease this amount by engaging in system repo.

    Increasing the quantity of settlement balances over an above that needed to ensure the smooth functioning of the payment system won’t have any direct effect on quantity of credit extended. And even if by some miracle lending exploded tomorrow, the aggregate quantity of reserves held by the banking system would remain the same, absent any additional CB operations.

    I have a lot of (very boring) BIS, Fed and BoE papers that I can dig up for you on this if you are really interested…

  5. Vimothy

    thanks – yes, if you have any papers that speak directly to the following, I’d be most grateful …

    To be clear, I’m not talking about the quantity of credit extended, I’m talking about the money supply. In addition to making loans, banks can buy assets with their cash, and that ought to have a “money multiplier” effect too, as the people whom the banks bought the bonds off redeposit it in a bank.

    The difference with the normal “loans” money multiplier, is that there the money ends up back with the banks after having been spent as a transaction in the real economy.

    Do you see what’s puzzling me? I’m under the impression that QE has not caused the money supply to rocket.

    My question is not about “putting money out into the real economy”. Banks could expand their balance sheets by taking the cash and turning round and buying bonds from pension funds, whatever. Why aren’t they? If they did, even if these pension funds turn round and put the money straight back on deposit without it ever touching the real economy, the banks could keep expanding their balance sheets buy continually buying more bonds etc. from non-bank owners.

  6. Luis, I may be misunderstanding your question. I’m feeling rather braindead, so apologies if I’m telling you what you already know. QE has not had any direct effect on broad money, nor was it intended to.

    Charles Bean:

    The reason for going through this in such mind-numbing detail is to make the point that the level of commercial banks’ reserves in aggregate is determined by the way we have funded the asset purchases, not by the commercial banks’ own decisions. The size of banks’ reserves cannot, as is frequently claimed, be a sign that they are “sitting on them”. No matter how rapidly or how slowly the economy is growing, or how fast or slow the money is circulating, the aggregate amount of reserves will be exactly the same. So it should be clear that the quantity of central bank reserves held by the commercial banks is useless as an indicator of the effectiveness of Quantitative Easing.

    Now obviously we would prefer that the money circulates more rapidly and that this is done through increased bank lending and deposit taking. In other words, we would like to see a further expansion of credit and broad money. Since the banks collectively are now awash with reserves, they should not be prevented from making additional loans because of any liquidity concerns. Banks are, though, constrained by a lack of capital and are looking to reduce leverage rather than increase it.

    Fortunately, increased bank lending is not necessary for Quantitative Easing to work. Indeed, it was precisely because the Monetary Policy Committee expected the additional monetary injection not to stimulate bank lending directly at the current juncture, that the Asset Purchase Facility’s purchases were targeted at assets held primarily by the non-bank private sector1. So if the Asset Purchase Facility buys gilts from pension funds or asset managers, they will then have to look for another home for their money. As it is not very rewarding just to hold it on deposit, they are likely to look to put their money into other assets, including equities and corporate bonds. Thus not only does the price of gilts rise as a consequence of the Asset Purchase Facility’s initial purchases, but also the prices of a whole spectrum of other assets. That in turn lowers the cost of non-bank finance and encourages increased corporate issuance. Also the rise in asset prices increases wealth and improves balance sheets. In this way, Quantitative Easing helps to work around the blockage created by a banking system that is still undergoing a process of balance sheet repair.

  7. ah – that looks like an interesting paper (after some googling)

    [but I’m not talking about the conduct of MP, I’m asking why banks aren’t going out and buying more assets to replace the assets they sold for cash as part of QE]

  8. oops – crossing each other, I was talking about McAndrews.

    Will read that BIS. From first glance, from the except you quote, isn’t Bean talking about the level of reserves?

    I think I’m asking about something else. If banks were to go out buy bonds, have the cash re-deposited, go out and buy more bonds etc. round and round, then the level of reserves would stay constant, but the fraction that level represented of their expanding balance sheets would fall. However, this expansion of balance sheets would multiply those reserves into more big M. Again, I’m not talking about lending, I’m talking about asset purchases. Which if I read Bean correctly is what QE was intended to do – raise asset prices. But I still don’t understand why in doing so this doesn’t cause the money supply to rocket. He says “we would like to see a further expansion of credit and broad money” but broad money can also expand without an expansion of credit, it can expand via banks using cash to buy assets, can’t it?

  9. So, the government should “cut out the middleman” and give it direct. To who?

    Biggest pork barrel ever. Imagine the cronyism, corruption, special pleading…like sharks on a bleeding corpse.

  10. Level of reserves–yes:

    “No matter how rapidly or how slowly the economy is growing, or how fast or slow the money is circulating, the aggregate amount of reserves will be exactly the same.”

    Expansion in the money supply–no, not directly, because we’re just trying to get assets to trade with greater velocity and at higher prices to raise net worth and lower the cost of non-bank borrowing.

  11. One answer would be that asset prices have already risen so high that banks think the expected returns from holding cash (zero or negative) equal the expected returns from holding all other asset classes. So despite the fact they could buy bonds yielding say 2%, they expect bond prices to fall, and they don’t want to buy equity for similar reasons.

  12. Luis–expansion of balance sheets only happens in this situation via raising asset prices, not the chain of sales and repurchases itself. There is no money multiplier in the chain because we are just swapping assets.

  13. “expansion of balance sheets only happens in this situation via raising asset price”

    …Or bond issuance driven by lower cost of borrowing, obvs.

  14. I guess if the owners of the asset bought by the CB is a non-bank, and the cash they receive is passed between non-banks in a sequence of asset trades, then the money supply just increases by the initial amount … or maybe falls.

    Imagine two people in a room that each own one asset. In their pocket they have pound coins, which is the money supply and all they have to spend in the real economy. The the central bank buys the asset off one of them for £10. What can happen next? The recipient of that £10 can then buy the other’s asset for £10. They could trade the asset back and forth for £10. If the price is going to rise, somebody has to dig into their pocket to add £1. So if you are talking about money passing back and forth between owners of assets, and prices rising, that takes some money out of their pockets.

    hmm, maybe not useful thought experiment!

    anyway QE does involve buying some assets off banks, and those banks could still go out and buy assets off non-banks, which should still increase the money supply because each time the seller deposits money with the bank that counts and more broad money don’t it?

  15. BTW, investment grade spreads are way down and debt and equity issuance for 09 is well up on average (see charts 4 & 6 in Bean’s BIS paper cited upthread), so in that respect QE seems to be having the desired effect.

  16. well your comment 13 could clinch it, if it’s right …

    I’m not talking about banks swapping assets between themselves for cash, I’m talking about banks taking cash, buying assets from non-banks, then having that cash redeposited with a bank. Why isn’t the multiplier working there? Say the non-bank keeps the cash it obtained in a chequeing account, isn’t that counted as part of the money supply?

  17. why doesn’t the receiving bank then take the cash and go out and buy another yielding asset off somebody?

  18. Ah, I see what you mean. Sorry, I said I was feeling brain-dead. Need to think this through. Er, and do some revision. I’ll be back…

  19. In Austtralia they gave us old age pensioners $500 each which we promptly spent.
    And things are not too bad here so they say.

  20. vimothy –

    lastest thought. If the central banks have engineered negative real interest rates, arbitrage principles would suggest price adjusted until (risk adjusted) expected returns are equally negative on all assets. A corollary of this would be that the expected return on nominal yielding bonds will equal that of zero-interest rate cash, because the nominal yield will equal the expected capital loss. In this case there is no point in banks using cash to buy bonds, hence money multiplier is dead.

    is everybody expecting negative real returns on all assets?

  21. Luis,

    Still thinking about this. It seems to me that if the CB cuts a cheque for you, Mr Non-Bank, from nothing and buys one of your gilts, the asset side of your balance sheet should register no net change (+deposit; -gilt), but you have increased the amount of money in your portfolio at the expense of near equivalents. That is, you have increased your stock of money while keeping the size of your balance sheet constant (ignoring asset price effects for simplicity).

    On aggregate then the stock of deposits held by the public should have increased by the same amount that their stock of gilts (etc) decreased. £175 billion (QE I) is around 12% of GDP and 8% of M4 (I think). Assuming the operation is unsterilized this should register as a large increase in broad money (while net private financial assets are constant), but I don’t see any evidence of this in the data I’ve seen (Bean 09, eg).

    To me this suggests that there is somehow no net money creation taking place, but I don’t understand how that can be, unless the fall in money supply growth was still occuring during QE I, and without QE, we would have had strongly negative money supply growth. But that seems too strong a counterfactual… Hmm.

    Re neg real returns: but then why bother with QE in the first place?

  22. Now he’s thought of it, and thinks it’s catchy, we will never hear the end of “qualitative easing”.

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