On that QE stuff again

First, let’s recall what QE is meant to do. The aim is to buy government bonds to reduce the yield on low risk funds with the intention of pushing money into higher risk assets where it is hoped that the cash in question will be used to stimulate real productive activity, and so demand, and as a consequence inflation in due course.

Pretty much, yes, at least he’s finally got that right.

All that has happened is that bank’s balance sheets have been boosted by near enough free money that they have lent at a profit, banker’s bonuses have been maintained, speculation has continued and asset prices have grown,

Still not quite grasped it though, has he. Asset prices rising and pushing money into higher risk activities are the same thing. this is proof that QE worked, not a problem with QE.

7 thoughts on “On that QE stuff again”

  1. Which sounds more like crony capitalism:

    a. Banks taking marginal profit on the sale of government bonds and lending it to whichever business they choose, or

    b. Favoured clients of the National Investment Bank getting access to billions of squid for projects they and their minister friend – and nobody else – have decided are desparately, desparately needed.

    Hmm.

  2. The Meissen Bison

    Pretty much, yes, at least he’s finally got that right.

    Well, like any regular here, he was bound to in the end. It might just have taken him longer than some for the penny to drop.

  3. Ironman, a fair and sensible question. Unfortunately, the question being asked seems to be “Which sounds more like capitalism (and is therefore doubleplus ungood)”

  4. except of course that isn’t what has happened. Central Banks buying bonds at silly prices has not led to investors moving very far down the risk curve at all – not least because insane macro prudential policy says that they can’t take any risk with their balance sheet. Joined up thinking indeed. So no money goes into productive investment, instead banks are buying bonds at silly prices and successfully selling them to the central banks at even sillier prices a year later. Just for variety they are buying some large company corporate bonds in a similar bigger fool trade allowing large corporates access to the free money pile as well as banks. Fitch has just estimated that if interest rates merely go to 2011 levels then so called ‘risk free’ high grade sovereign bonds will lose $3.8trn in value. Meanwhile they also destroy all the liquidity in the name of risk management…

  5. And most banks don’t hold very much of their assets in the form of government bonds – not compared to (say) a pension fund.

  6. By buying gilts for newly created cash, the BoE is indirectly funding the government. That is the main effect. The only difference from handing the money to the government directly, is that under the QE method the BoE now holds gilts which it could sell in future to reverse the cash injection into the economy, which could be handy if inflation should take off.

    The central bank buys gilts on the open market, not from banks necessarily. Pension funds are on a one way trip and do not generally sell gilts to buy riskier assets. However, higher gilt prices does mean that they cannot afford to sell risky assets to buy gilts (this really is what is meant when you hear the press talking about how pension scheme deficits have ballooned recently since “liabilities” are represented by the portfolio of gilts that pension schemes need to hold to fund their benefit payments on a ‘risk free’ basis). Insurance companies are in a similar place.

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