Twelve years ago quantitative easing was considered radical. It was called 'unconventional' monetary policy. Actually, it was government just using the power it has to create money at will, which had been pretty much denied until that time.
Now QE has become conventional - there will be more than £400 billion of it done this financial year in the UK alone. But there are problems with it. As a result I am creating a mini-series on the issues that QE is giving rise to, how we can address them, and how this relates to modern monetary theory, which some would like to see replace QE. This is the first in that series, and focuses on the strengths, and weaknesses, of what is now conventional QE.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
First line typo. Radical not racial?
That was autocorrect and not being awake enough
Thanks
Think you mean radical not racial in your first sentence above.
Thanks
Appreciated
It is new money in the wrong place in the economy.
The justifications for QE:
To steady the market,
It increases market liquidity, are bogus.
Both instantly create or maintain asset price inflation. Opps.
A rising tide floats the twigs before the boats.
New money is best for the economy when it is spent immediately,
By the needy or proxies for needy, housing, health, food.
To deny it, is to deny the democracy of ‘the people’.
It was created in their name, but used without permission.
Well said.
Agreed, they spend it because they have no choice. I’m expecting extra money soon. It will primarily be spent on a new mobile as my battery is stuffed and cannot be replaced. I also require new glasses which I currently cannot afford.
The first will boost the retailer I buy a mobile from, the second will boost the optician, the lens producer, the courier delivering it etc. etc. I will fix other things in need of fixing. There may be some spending on food and drink (the making of, I brew). Clothes may be bought as well. The list goes on. Everyone on a low income has such lists, they vary over time.
Yesterday I disovered my freezer was not on despite being plugged in. Oh no. Fortunately I suspected the plug fuse was an issue, replaced it and a huge Phew! That would have been: take on debt for a new freezer repaying it when the money comes (hopefully). I need a freezer, it keeps my open packs of vacuum packed hops well preserved. A very important function.
I think there ARE better ways to do things and I wait with bated breath for your alternatives to QE.
Regarding this video? A good statement of what QE is and its history. If I were to be critical I would say that 10mins is the maximum that a video should last for the best engagement…. 6 or 7 mins being ideal. That said, it is tough to condense the QE story too far.
2008/09 was a financial crisis and the challenge was to prevent it spilling over into the real economy. 2020/21 is a real economy crisis and the challenge is to support the real economy. (Although supporting the real economy supports banks which prevents a real-bank-real crisis spiral developing).
A FINANCIAL crisis requires liquidity provision and support for asset prices to restore confidence in the system and QE was a part of that process. By and large it was successful.
A REAL economic crisis requires direct spending by the government into the economy to people and businesses to replace income. QE is part of this process, too, but the objectives are different. Indeed, many policy makers are struggling to get their head around the fact that QE is all about delivering money for the government to spend. They still talk about low rates encouraging investment etc. – when the transmission mechanism is completely broken. Only when this is accepted/understood it might be possible to improve on the blunt instrument that is interest rate policy and QE.
Finally, one small point. Everyone seems to think that banks are a huge beneficiary of QE. They are in the sense that QE supports collateral values that preserve the quality of their balance sheets but the real beneficiaries are asset owners… and they are not banks. On the contrary, zero rates is a disaster for banks as it leads to massive margin compression. Not asking you to shed a tear for penniless bankers but do not let the real beneficiaries of QE (middle class folk with property and pension funds (yes, that is me, too)) to hide behind the banks.
Many of those points might come up in the next video
Please excuse a slight aside, but does anyone know who is advising Anneleise Dodds on economic policy right now ? Is it the ususal suspects?
I don’t know
Would concur with what Clive says here too.
For anyone interested the BoE actually did a study in its own initial rounds of QE post 2008 and found , as you say in the video, that QE did avert a banking crisis. It also helped stabilise the stock markets too, on recollection the FTSE experienced a 100 % gain in the following years and has not really fallen much since. That is some inflation. Property prices increased as well and are now back at 2008 prices and above in some areas. the problem that caused ,as you also point out, is that this was very nice for the owners of shares and property but maybe not for anyone who owns neither.
This is the bad side of QE, since it increased inequality. The BoE’s own study in 2012 showed that it most benefitted the top 5% who owned 40 % of the assets, not a great result. As one MP said in the HoC, if the Governor of the BoE had initially suggested that he was going to introduce a scheme that made the top 5% on average £125 000 each better off the House may have asked some more questions…quite!.
The BoE did a further analysis in 2018 to try and defend its actions, as this article explains, saying everyone benefitted from an increase in overall wealth, even though some did not feel it had directly. Depends if you look at this form a percentage of your total wealth or at your overall bonus cash figure!
https://www.ft.com/content/a2f0c024-32ac-11e8-ac48-10c6fdc22f03
Mark Carney at one point even said that the BoE was not able to rebalance the obvious “distributional effects” of QE, and that it was up to the govt to do that fiscally.
https://www.theguardian.com/politics/2016/oct/06/mark-carney-backs-prime-ministers-call-for-economic-shakeup
It would be better all round if we have the Treasury and BoE working together on this, not as two independent(or semi independent) institutions. To cut out the banking middle men on the usual QE/secondary market and just create the money somehow directly if required. I think you did mention the Ways and Means account in the past.
Your conclusion is right
Taking up Clive’s point – we should distinguish between retail banks and the investment/merchant banks. Pension funds are a big problem and it seems to me that the role of pension funds in the modern economy and financial system has been under the radar for far too long. Pension funds are the gateway feeding money into the financial sector casino through these investment/merchant banks and they feed off one another. So whilst middle class folk like Clive and me benefit from financial asset price inflation (in the short term), stoked by QE, none of us exert any influence whatsoever over what purpose the savings we have in pension funds are put to. I was a pension trustee for 7 years before I took early retirement and during those 7 years it was apparent that I could exercise zero power of influence in the context of countervailing power which derives from a conflation of the legal structures governing pensions (and in particular the law relating to “fiduciary duty”), accounting conventions (also supported by laws) and the pwerful narratives of “modern portfolio theory” and the like. The whole edifice is a rent extraction machine.
@Jim,
Dean Baker said this in 2 weeks ago,
” In the 1980s and 1990s private equity companies were able to find many underpriced companies, turn them around and make large profits reselling them when they took the company public. This no longer seems to be the case as their returns have largely followed the market since 2006. This means that there is no reason for pension funds, the major source of private equity funding, to be tying up their assets with them.
Even though pension funds may not be gaining by investing with private equity, many of their managers are convinced that they do. There is an easy remedy here. Just require the terms of all contracts of public pension funds with investment managers, including private equity, be posted on the fund’s website, showing in clear terms what the managers get paid and the return on the investment. It is likely that the mediocre returns on private equity funds, coupled with the large payments to the private equity managers, would soon discourage pensions from continuing to turn over large amounts of money to these funds.
https://rwer.wordpress.com/2021/01/01/end-of-the-year-thoughts-on-inequality-and-its-remedies/
Vince, that is just like advocating that the solution to climate change and eco-systems desolation is to ask consumers to exercise their choices more carefully. Similarly Mark Carney proposes to change financial institution behaviour by asking them to “behave themselves” and for the managers of these institutions to promote “values of good behaviour”. God forbid that we should change the institutions, structures, regulations and laws which are driving us to disaster.
[…] have already done the first in a mini-series of videos on the issues that QE (quantitative easing) is giving rise to, how we can address them, and how […]