Kamis, 05 Juli 2012

Quantitative easing: does it just boost bank profits and what are the alternatives to QE?

Quantitative easing: does it just boost bank profits and what are the alternatives to QE?

By Adrian Lowery

PUBLISHED: 06:30 EST, 5 July 2012 | UPDATED: 10:41 EST, 5 July 2012


'Let's give more money to the banks!'

It is perhaps not the best time for the Bank of England to persuade UK citizens that what is needed right now, is to swell banks' cash reserves - and profits - with another £50billion dose of quantitative easing.

There are still questions as to whether it works and controversy over its side-effects on pensioners and savers - see box below.

Printing money: QE is being blamed for dramatic fall in annuity rates

Printing money: QE is being blamed for dramatic fall in annuity rates

WHAT IS QE, IS IT WORKING, AND WHAT'S WRONG WITH IT?

What is QE?

The Bank of England electronically creates new money to buy government bonds, or gilts, from banks. It is hoped they will invest the cash they get in other assets like corporate debt, lowering long-term interest rates ('gilt yields'), boosting business borrowing and getting the economy moving again.  

QE also pushes up asset prices and boosts the stock market, by diverting new funds into equities, thereby creating a 'wealth effect' that cascades through the economy â€" or so the Bank hopes.

Is it working?

The short answer is, it is hard to tell. Critics will point to the fact that the UK economy has slipped back into recession, that firms are still cutting staff and that the stock market is treading water. Advocates will say that it all would have been a lot worse without QE.

There is evidence to suggest that initially QE had the desired effect, significantly lowering long-term interest rates - and that it has boosted economic output and the stock market. It is less clear whether ongoing and future cash injections will continue to work - the suspicion is that there are diminishing returns from the policy.

What else is wrong with QE?

Campaigners claim QE has impoverished pensioners by driving down annuity rates, which are  attached to gilt yields. They also say that falling gilt yields have fuelled record deficits in private sector final salary schemes.

In something of a double whammy for elderly savers, QE also helped to keep inflation high - well above the 2% target set for the Bank by the Government - for the last few years, negating interest returns and even reducing the value of deposits.

How much inflation is being stored up in the system is one of the great unknowns surrounding QE.

Dhaval Joshi of BCA Research has argued that by pu shing up share prices and profits, without feeding through to wages, QE has led to a fall in real wages for most people and rising inequality.

But in the wake of the Libor-fixing scandal that this week cost Barclays' boss Bob Diamond his job, a further criticism is gaining credibility: that all QE does is give banks lots of cash to fritter away on bonuses for executives and on casino banking.

It can be seen as the latest in a line of policies favouring the banks ahead of other sectors and the real economy in general.

Barclays might not have received taxpayer cash via a bailout like Lloyds and RBS but they have, along with the remaining banks, received support from the Bank and the Treasury in the form of liquidity and credit guarantee schemes.

And one estimate put the benefit to UK banks from the government's implied guarantee in the wake of the financial crisis - the so-called 'too big to fail' subsidy - at £30bn a year.  

So what are the alternatives to QE?

There are several possibilities, most of which seemed to have been called 'credit easing' at some point - a term used so indistinctly it's become a bit meaningless.

1. Many experts - including MPC member Adam Posen - have argued that the Bank's QE purchases should be used to purchase corporate bonds directly rather than relying on the banks. If the Bank bought corporate bonds itself, if could directly lower borrowing costs for firms. In the U.S. the Federal Reserve h as also bought mortgage-backed securities.

Difficulties arise in deciding which firms' debt to buy - the government would be in effect trying to 'pick winners'. Moreover, only large, often listed, companies issue corporate bonds - and it is small and medium-sized enterprises (SMEs) that are struggling to get loans and finance. So ...

2. Banks could package small company loans and overdrafts into so-called 'securitisations' which could then be bought. But it is a question of persuading banks to do this. Mr Posen has said: 'The MPC should be contributing to the development of a functional market in securitized small business lending by making it clear we will purchase such securities that meet general criteria.'

He also went a step further to suggest...

3. The Government should create a 'Fannie- Mae type of entity' which would bundle loans to small and medium-sized firms. The Bank of England could buy these up.

What about investing the money in real things, like infrastructure?

Caroline Lucas, Green MP for Brighton and Hove has made a strong argument for ‘green quantitative easing'. It calls for QE cash to be shifted towards green investment projects to support renewable energy and energy efficiency projects.

Lucas argues: 'Rather than handing the money over to the banks, who then sit on it, green QE would put money into the wider economy - creating thousands of new jobs, improving energy security and tackling climate change at the same time.'

Danny Gabay of consultancy Fathom has argued that the electronically created money would have been better invested in housing.

Can they not just give us the money?

With QE the Bank buys Government bonds with the money: it is increasing the money supply in exchange for assets.

Putting money straight into the economy is very different. It is unfunded fiscal expansion - or effectively funding the government deficit by printing money. That's what happened in 1920s Germany and modern-day Zimbabwe and as then would be highly inflationary.

Here's what other readers have said. Why not add your thoughts, or debate this issue live on our message boards.

The comments below have not been moderated.

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Keeps the filthy rich ! RICH

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"Does quantitative easing just boost bank profits" Yes and goes to bonus payments to the great and good. It also stops shareholders being wiped out as the whole debt pyramid collapses. It doesn't help the man in the street by one penny but lands him with more tax debt. I suspect only a few percent at most, trickle into the UK economy, probably more finishes up in offshore tax havens. But hey it helps the great and the good.

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QE causes inflation, debases the currency, smashes annuity rates, devastates savings, keep house prices high, funds the banks and deficit spending. It does not support the wider UK economy but is an effective method of transferring wealth to the 1%. And as Osborne has said; Printing money is the last resort of desperate governments when all other policies have failed.

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Doing nothing is an infinitely preferable option to QE. You don't need to be an economist to understand this.

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Jesus, you're quoting Adam Posen as your expert. The Adam Posen who said he would resign if inflation wasn't below target by mid 2012. It wasn't and he didn't. Now he is actually suggesting a Fannie May style packaging of small loans which otherwise would be unsaleable. In other words a type of bundling of sub prime loans. THIS IS WHAT STARTED THE WHOLE B####Y MESS IN THE FIRST PLACE!!!!!!!!!!!!!!!!!!

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It is a popular misconception that QE helps banks. Most gilts are purchased from asset managers and a tiny proportion from bank trading portfolios.QE would help banks to lend to companies and mortgage borrowers if the BoE instead of buying gilts bought the top slices of CLOs or RMBS. The BoE would have little risk from such assets which would have the added benefit of being floating rate assets. The credit risk would be retained by the banks and reflected in the capital ratios they must maintain. The purchases would provide the banks with liquidity, currently a scarce resource, which would allow them to make further loans. As these top slices trade with a yield of circa 2.5% the BoE would have more profitable assets than gilts and the banks would be funding at a cheaper rate than in the unsecured market. A win/win solution. This combined with the new liquidity facility being offered by the BoE will drive down the cost of borrowing and encourage investm ent.

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This money anchors us to massive debt for more than a generation; instead of giving it to the banks just to shore up their reserves why not give it directly to us to spend, we'll all buy new stuff and create real demand - or am I missing something here, oh yes bank bonuses, sorry I forgot.

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