The Fed has gone for quantitative easing. As the FT notes:
The Federal Reserve, in one of its most important decision in decades, said it would buy $600bn in longer-term Treasury bonds by the end of the second quarter next year.
Proportionately, of course, this is a smaller programme than the UK’s QE programme.
But where the Fed leads the UK follows, and the chance that the UK will now use another round of QE to try to avert double dip recession and / pr deflation is high.
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. Do it as last time and the break down in our economy will get worse.
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It certainly looks like a lost of the new money supply has gone straight into various asset classes, including the capital markets as well as property.
I have what might be a very dumb question, so apologies in advance. My understanding is that the BoE is buying Gilts directly from the Treasury, for which it pays with new money that it effectively creates. Is this not the case? Or if not, in what way are the commercial or investment banks involved?
Thank you.
Richard, I have to agree, the best way to get money into the economy is to give it to the less well off. If you give £500 to someone earning £15k or less they will spend it. Meaning a big boost to the economy
Give money to the rich and they save it and therefore no gain to the economy, like QE1.
No vested interest except in keeping my job, I earn a reasonable crust.
Agreed – but how can the Bank of England do what our economically illiterate Chancellor will not?
I agree. Quality rather than just quantity… or else QE2 could end up being more like the Titanic. 😳
[…] easing is not easy to understand. One commentator asked a pretty logical question yesterday: I have what might be a very dumb question, so apologies in advance. My understanding is that the […]
Richard, genuine question:
If the banks sell £200bn of bond to the BoE in return for £200bn of cash, and then just add the cash to their cash reserves, how are they (the banks) benefiting?
They benefit from higher-than-otherwise bond prices when they make the bond sale, but once they have £200bn of cash why do they benefit from holding on to it?
[for avoidance of confusion – accumulating cash reserves is a fundamentally different thing from rebuilding capital cushions, which banks are doing, and comes from retaining earnings or equity raising]
[…] Qualitative easing — investing money created by the Bank of England direct into the UK economy — until these […]