I have argued that quantitative easing was life support for financial markets. As if to make the case there is this stunning chart in the FT today:
As the FT says of this:
As the chart below shows, there has been a close (if not necessarily directly causal) link between the Fed's interest rates plummeting to zero, its balance sheet swelling to over $4tn, and the recovery of the US stock market. Of course, quantitative easing has already ended without equities collapsing, but even somewhat higher interest rates will pose a challenge.
I accept the point: correlation is not proof of causality.
But if anyone thinks the injection of funds from the state into banks that were supposedly to be used for loan purposes but where actually used for financial speculation did not give rise to this association then they are going to have to come up with some mighty clever reasoning. I believe the link is very clear and will take a lot of persuading to the contrary.
And given that it is also now clear that, even if we are not facing another immediate recession after this week's financial turmoil, we are facing a period where the expectation of growth fuelled by China is over then the tools to deal with the ramifications of China's economy being in a mess need to be thought about now.
Surely we can't create another stock market boom as a reaction? The evidence is that we've tried that and it has not worked.
So next time what's available? I suggest it is People's Quantitative Easing. We've done life support for financial markets: next time we need to do it for real people.
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Now down to Mark Carney and his gang of analysts at the Bank of England to put forward a convincing alternative causal explanation. Important too for Andy Haldane to look at it from an economic stability viewpoint since stock markets are a form of saving and too much of it relative to investment in the real economy is destabilising.
What kind of injection was this? An injection into bank reserves,assets swapped for actual money or simply giving them the money or something else?
Ysaac, QE in practice just handed the players in the casino a fresh set of chips.
The US Federal Budget figures show that deficit reduction has stalled in the last 3 months, and it’s a very good bet that the US will bring in QE4 which in effect allows their government to continue to overspend in a way which doesn’t add to the interest burden.
As the allocation of the overspending is democratic in theory ( if half don’t care to vote, that’s their problem ) then the overspending gets spent on things the people desire.
There is for functional purposes no difference between QE and PQE except that under PQE there’s an official acknowledgement rather than the current nod and a wink it will never be paid back. Under PQE the money might be hypothecated to a national infrastructure board which hasn’t yet decided whether it’s going to lend money or just be a grant making body, which is pretty much the job of government financing already.
QE will never be paid back
We need the money it creates
When will you get that?
how about the link that QE buys government bonds. this pushes down the yield on government bonds and so means people want to buy alternative stocks/bonds so they buy stocks in companies and so the stock price rises. this isn’t financial speculation its people investing in the highest return and this is part of the reason for QE in the first place
OK
How does that undermine my argument that this benefited the financial services sector?
as firms benefit from higher share prices too. normal people owning shares (granted thats weak as most people owning shares are probably middle/upper class).
and there could be so many other links that are not just about benefiting financial services. what if the share price rose because the QE improved confidence in the market , or allowed firms to access finance through issuing more shares a a time when they could not get investment from banks.
also may i ask what is wrong with supporting financial services, especially in the uk where it is one of the biggest sectors. If manufacturing was the largest sector you wouldn’t bemoan policies that only helped them. and please dont say something like they started the crash as uk firms did not start the crash and regulation could help solve this issue anyway, or that they do illegal things like libor etc etc etc because if a few guys in a manufacturing company were making a dodgy product you would not demand the demise of the whole industry.
Why do companies benefit from higher share prices? None goes to them. Did you know that?
And share issues are like hen’s teeth
You are referencing a world that does not exist
The ‘shareholder value model’ a.k.a.’value based management’ has wormed its way into the public psyche over 3 decades leading some to think that companies benefit from higher share prices. They don’t.
The principle reason that you would not want to increase the size of the financial sector is that they don’t actually produce anything. They run a casino at the expense of the real economy.
As Keynes put it:
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
Ch. 12, General Theory.