Why Is Qe Not Working?

[Timm]

So, the base money supply has increased by 450% since 2007 with more to come. But the banks are not lending. They appear to be hoarding this new money.

Why?

[Imminent_plunge]

So, the base money supply has increased by 450% since 2007 with more to come. But the banks are not lending. They appear to be hoarding this new money.

e

Why?

They're hoarding money because they have a fair idea of the number of defaults that are going to hit them in the next few years? Interesting that lending criteria has tightened - not on the basis of someone's earning multiples but on the deposit and they don't seem to be to fussy about where that comes from. That suggests banks expect a sharp downwards trajectory in property prices. Any mortgages granted between 2004-2008 will be in NE, with a much higher chance of defaults.

[Fudge]

We have the commercial property and credit card bombs to go off yet, and the banks know it.

[Guest KingCharles1st]

They are not lending because they have been reading HPC!

[Bloo Loo]

So, the base money supply has increased by 450% since 2007 with more to come. But the banks are not lending. They appear to be hoarding this new money.

Why?

balance sheets.

here lies the reason.

this appears to be a balance sheet recession. the cash merely replaces the loss in value of the financial assets they hold.

the whole crunch has been billed as one caused by a lack of liquidity. If this was the true case, then yes, the QE would be out there inflating everything...but its not, its nestling in banks balance sheets, NOT losing value by the day as the financial assets are.

Probably, a lot has gone on stocks too.

insolvency was the real worry for the banks...hence, liquidity hasnt helped.

[Willy Weasel]

Merv dealt with this yesterday. He made the point that QE has had an effect to the extent that it has reduced the price of money (if you increase the quantity of money you inevitably reduce its price).

He also made the point that you have to consider the counterfactual ie what would have happened if there had been no quantitive easing. His argument is the price of money would have risen making the recession even deeper.

[STRLondon]

they get money off the BOE at 0.5% and lend it out at 5% - 4.5% spread - not bad. However, this sort of lending isnt profitable in a resession, as if 1 in 20 people cant pay the money back, you actually loose 0.5%.

They need to gamble on the most highly speculative ventures to dig themselves out of a hole. lending to the public has limited upside and almost unlimited downside for them.

For each £1,000,000 they have in deposits, they conjure up multiples (10-20 times that) in lending. Now instead of getting exponential gains, they are getting exponential losses. So stopping the losses is the best way for them to make money. As my dad used to say, every penny saved in a penny earned.

[MOP]

"Insolvent banks refuse to hand out money shocker"

Edited August 13, 2009 by MOP

[Dave Spart]

QE sounds like when your trying to catch someone's attention.

[Bloo Loo]

Merv dealt with this yesterday. He made the point that QE has had an effect to the extent that it has reduced the price of money (if you increase the quantity of money you inevitably reduce its price).

He also made the point that you have to consider the counterfactual ie what would have happened if there had been no quantitive easing. His argument is the price of money would have risen making the recession even deeper.

and shorter.

course, a few bankers would be on the dole where they should be.

[Bloo Loo]

they get money off the BOE at 0.5% and lend it out at 5% - 4.5% spread - not bad. However, this sort of lending isnt profitable in a resession, as if 1 in 20 people cant pay the money back, you actually loose 0.5%.

They need to gamble on the most highly speculative ventures to dig themselves out of a hole. lending to the public has limited upside and almost unlimited downside for them.

For each £1,000,000 they have in deposits, they conjure up multiples (10-20 times that) in lending. Now instead of getting exponential gains, they are getting exponential losses. So stopping the losses is the best way for them to make money. As my dad used to say, every penny saved in a penny earned.

just wondering...how does the BoE accumulate the money to pay the interest?

[InternationalRockSuperstar]

Why Is Qe Not Working?

it is.

[Guest DissipatedYouthIsValuable]

Because QE is ******** when it comes to the masses, i.e. everyone not on the 'jolly' side of a banking licence.

Banks get money from BoE.

The masses can be vetted to see whether they can be allowed to borrow more debt to get out of debt at higher interest rates than usual, while they shit their pants about whether they're going to be employed next week.

Vive la recouvereh!

[kzb]

Is QE actually going to the banks? Or is it being used to fund government expenditure directly?

[Bloo Loo]

Is QE actually going to the banks? Or is it being used to fund government expenditure directly?

thats a good question.

there is some talk that the bonds sold are coming back to the Bank in days...not a direct gift to the government, but not far off...with a gift to the bankers of course.

[Timm]

balance sheets. here lies the reason.

this appears to be a balance sheet recession.

the cash merely replaces the loss in value of the financial assets they hold.

the whole crunch has been billed as one caused by a lack of liquidity. If this was the true case, then yes, the QE would be out there inflating everything...but its not, its nestling in banks balance sheets, NOT losing value by the day as the financial assets are.

Probably, a lot has gone on stocks too. insolvency was the real worry for the banks...hence, liquidity hasnt helped.

Thanks everyone.

So, if the new money is to a large extent just shoring up the balance sheets of banks against current and future losses, does this mean that it is stuck there? Or given recovery in the future, will it be available for lending?

Or would it be better to think of it as it being available for withdrawal by depositors, whereas before, such attempted withdrawals would have exposed the insolvancy of the banks?

[kzb]

That was my understanding of QE Bloo Bloo. I thought it was one arm of government buying bonds off the other. It's the taxpayer buying the bonds, not the banks. So I don't understand why it should affect bank lending one way or the other.

[Bloo Loo]

Thanks everyone.

So, if the new money is to a large extent just shoring up the balance sheets of banks against current and future losses, does this mean that it is stuck there? Or given recovery in the future, will it be available for lending?

Or would it be better to think of it as it being available for withdrawal by depositors, whereas before, such attempted withdrawals would have exposed the insolvancy of the banks?

well, banks have serious exposure to: housing defaults, housing values, credit card defaults and soon, business loan and property defaults.

all these assets are in danger....they need capital, unchanging, cold hard cash...that doesnt change in value ( numerical value that is...and thats what balance sheets are...numbers)

[Willy Weasel]

That was my understanding of QE Bloo Bloo. I thought it was one arm of government buying bonds off the other. It's the taxpayer buying the bonds, not the banks. So I don't understand why it should affect bank lending one way or the other.

QE works because banks hold gilts and if they sell them to the BoE then then hold cash. The money supply is thereby increased because instead of having just the banks holding gilts, you have the BoE holding those gilts and the banks holding an equivalent amount of cash.

[kzb]

I think it is working. How has the economy only shrunk by what it has, compared to what could have happened? How can house prices be going up otherwise?

[Guest Daddy Bear]

Why is QE not working?

Are you blind man?

Look at commodities prices, stock prices, oil, etc etc etc..

That's the thing about a bubble - no one ever see it inflating.

[Bloo Loo]

I think it is working. How has the economy only shrunk by what it has, compared to what could have happened? How can house prices be going up otherwise?

which QE money has entered the real economy for loans?

is it A: None at all or B: None at all.

[Willy Weasel]

which QE money has entered the real economy for loans?

is it A: None at all or B: None at all.

I think the point is that without QE there would have been even less money being loaned out so to that extent it has had an effect.

[Bloo Loo]

Are you blind man?

Look at commodities prices, stock prices, oil, etc etc etc..

That's the thing about a bubble - no one ever see it inflating.

I do. and if it all stays in stocks,,, we will have a 20,000 FTSE and unemployment at 15%.

why lend into the community at 6% when you can make 30, 40 or 50% on stocks fuelled by an infinite supply of QE.

[Willy Weasel]

I do. and if it all stays in stocks,,, we will have a 20,000 FTSE and unemployment at 15%.

why lend into the community at 6% when you can make 30, 40 or 50% on stocks fuelled by an infinite supply of QE.

Because QE isn't infinite and ultimately stock prices depend on the performance of the companies comprised in the stock market not on QE.