Why Is Qe Not Working?

[Bloo Loo]

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.

may be true..

insolvent banks suggest its not. the QE is just for banks balance sheets.

we have serious deflation going on in the financial space. they need the bankers to survive.

dont forget, that even if QE is slipped into the government by the BoE effectively buying the debt immediately, the government are still paying interest on it.

[Wait & See]

Quick Emigrate!!

[Bloo Loo]

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

stock prices depend on the demand for stocks.

QE is not infinite. although it could be...there are no controls.

[MinceBalls]

may be true..

insolvent banks suggest its not. the QE is just for banks balance sheets.

we have serious deflation going on in the financial space. they need the bankers to survive.

dont forget, that even if QE is slipped into the government by the BoE effectively buying the debt immediately, the government are still paying interest on it.

IMO Bloo Loo is right - its a solvency issue not a liquidity issue. This goes for countries as well as banks.

Seeing as the RBS loan book alone is over £1 trillion it is quite easy to see why all the banks are hoarding cash - they are sh1t scared of what is coming. £175 billion is the equivalent of financial homeopathy (infinitely small % of active ingredient)

[Willy Weasel]

stock prices depend on the demand for stocks.

QE is not infinite. although it could be...there are no controls.

And demand for stocks is governed by the underlying performance of the companies listed on the stock market.

There are controls on QE. The BoE will only engage in QE if:

1. It judges it necessary to hit 2% CPI in the medium term

2. The Chancellor provides the BoE with a full indemnity

Either may not happen in the future.

[Guest Daddy Bear]

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.

if it all stays in stocks,,

It won't. Give it time and maybe even a few govt. regulations and it will permeate all sectors of the economy. It's like water finding path of least resistance.

Mind unemployment will probably still go to 15%

(House Prices will still fall in real terms though - must put this in all threads in case they get banished to economic section)

[porca misèria]

It is working.

The banks aren't lending all that much, but people are moving their money out and using it elsewhere. The stockmarket and housing market are taking in more money, and even retail is seeing increases. While at the same time productive employment - real money-with-value - collapses.

Bad money drove out good before the credit crunch. Now funny-money is filling a vacuum where the bad money collapsed.

[DabHand]

And demand for stocks is governed by the underlying performance of the companies listed on the stock market.

O RLY?

Sorry but this doesn't apply to serial speculative bubble economies.

[Guest Daddy Bear]

It is working.

The banks aren't lending all that much, but people are moving their money out and using it elsewhere. The stockmarket and housing market are taking in more money, and even retail is seeing increases. While at the same time productive employment - real money-with-value - collapses.

Bad money drove out good before the credit crunch. Now funny-money is filling a vacuum where the bad money collapsed.

Agreed - its not just the mechanical effect of QE its the effect on change of sentiment.

When people read about "printing money" they alter their behaviour and start spending their cash as opposed to hoarding. (look at retail sales etc).

Eventually a tipping point will come as currency devaluies massively.

[Timm]

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.

Seeing as this thread was started partly as a stealth inflation thread, you could at least be polite.

Of course QE is working.

But if I'd entitled the thread "Why is QE not creating Hyp*r Infl*tion", we'd have been in the Economics sub forum before you could shout "Censored"...

[sossij]

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?

I'm sorry I don't know but your question does raise another... why not lend directly from the BoE to businesses/industry at low rates? When a business goes out to spend, i.e. purchase goods and services etc. this money it would in turn have to be deposited somewhere, i.e. a bank. Doing this would would require the banks to act in a responsible and commercial way in order to win the business from industry. They could then, of course, go on to sure up their balances etc. but they would have to behave competitively rather than just hoarding the cash instead. Wouldn't rearranging the chain of money supply from

[boE > banks > business] (doesn't work as money doesn't leave from banks)

to

[boE > business > banks > business again (hopefully)]

break the deadlock we're in now?

Would this work? Even in theory? Or am I missing something?

[A.steve]

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

I'm not sure I follow where this question arose, but taking it in isolation, it's a question I asked when I discovered that in 2006 the BoE started to pay interest on reserve balances - and again in the context of QE.

First, interest on reserve balances are paid from the interest received from ordinary central bank lending. In a 'repo' gilts were lodged with the BoE as collateral (ownership transferred) and were redeemed just in time to receive their coupons - rather like with a pawn shop where assets are only redeemed on the day they're needed then pawned again - interest is paid to the BoE in a 'repo' - and that (some of) that interest is now used to pay interest on reserve balances. The idea, essentially, is that juggling gilts to minimise repo debt was quite a hassle - but banks ran tiny reserve balances because every penny in that account was earning nothing. The BoE argues that paying interest on reserve balances makes managing day-to-day operations less bureaucratic... which I'm sure it does - but, I'm interested to note, cash borrowed from the BoE by one commercial bank might reside in the reserve account of another... in principle it is plausible that a single commercial bank might receive net interest from interacting with the BoE... which was never before possible. I'm not sure it's relevant, but it is - IMHO - interesting.

With QE, something a bit different is happening. The ownership of gilts is being transferred permanently to the BoE - for a price. As long as the BoE can borrow from itself against the assets it buys... and can account for interest payments to itself (plus any amount over-and-above face value paid) from coupons, then there is no theoretical problem. The BoE is only doing something that an 'ordinary' bank could have done - assuming one existed and had sufficient capital. This, I believe, is what demands that the treasury underwrite QE - they provide the capital... in case the BoE makes an error of judgement... and suffers a capital loss for which no other party can be held liable. From a slightly different perspective, QE is not all that different from an ordinary Repo - the principle distinction being that rather than the government being liable to a commercial bank being liable to the central bank, the government's liability is transferred to the central bank.

This brings us back to the topic - who says QE is "not working"? What objective is assumed?

QE does expand the money supply by way of increasing demand for gilts - which, in turn, effectively, allows future coupons on safe assets to be invested today. This, of course, is a double-edged sword - this "future revenue" will no-longer be paid to commercial banks - making them dependent on riskier investments for their revenues tomorrow. QE, essentially reduces the 'safe' option for commercial banks - stimulating demand for riskier loans. Of course, this begs an important question: were riskier loans being shunned for reasons of a lack of funding, or a lack of capital - or because they were fundamentally loss-making propositions? I suspect the latter - but proving this to be the case looks nigh impossible. A key advantage with QE is that the central bank can argue robustly that any economic problem can't reasonably be a result of monetary policy. For me, this observation seems wholly reasonable - but I recognise it to be a political hot-potato... and doubly so in light of the state of government finances.

As far as I'm concerned, QE must have "worked" - by definition... it has increased the price of gilts and lowered their yields (easily verifiable) and undermined any claim that commercial losses in the financial sector were an inevitable consequence of 'frozen credit markets' or an irrational 'logjam'. The real economic problem is that banks became bloated and criminally lazy - they've lost track of how to establish which customers are a good risk and which not; loans already made place many individuals and companies at peril of bankruptcy; inevitable capital losses (however deferred) remain as a stench to undermine confidence. QE can't influence any of these real-world issues - and they remain the key to matters today. For this reason, my focus is now mainly on direct government spending, the tax gap and foreign exchange. QE, however, "worked" - it did exactly what it said on the tin - even if our problems are far deeper than mere monetary policy.

[piece of paper]

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.

Newspeak. If you're going to consider the 'counterfactual', why doesn't that extend to what the position would have been were the bubble not have been allowed to inflate.

Perhaps a murderer could ask for the fact that he didn't murder five other people to be taken into account?

Could posters please tell when they first heard the term 'counterfactual' used, particularly in the context of economics?

Also, perhaps we could explore its application in these increasingly bizarre times.

p-o-p

[A.steve]

Could posters please tell when they first heard the term 'counterfactual' used, particularly in the context of economics?

I've only ever heard it used in the context of philosophy and logic. I think I've read it in a book published in the ~1950s (not 100% sure and I'm not about to re-read several to check!) Counter-factual analysis is a very specific activity - it is not about denying facts - but about analysing the best estimation of what would have happened if different decisions had been taken at various strategic points... with a view to better understanding to guide future decisions. Counter-factual analysis is critical to many disciplines - especially economics/politics/war - as it is impossible to conduct any form of scientific experiment... because there can be no effective control. If taken to an extreme, one can tie ones-self in knots trying to reason the 'what ifs' - perhaps, in extremis, leading one to question free-will or the reality of decision making. This, of course, isn't helpful - it certainly feels as if we make choices - and counterfactual analysis assumes not only this, but that our choices will have (to some extent) predictable effects that are better estimated a posteriori.

A deep question, IMHO, surrounds the authority of governments to engage in large-scale moves when, in every attempt to justify their actions, they rely upon a notion of scientific thinking... a thinking which must be a sham because there can be no sufficient empiric evidence to justify central planning of any kind.

[Bloo Loo]

I think Mandelsons current argument for current policies are that the TORIES counterfactuals would have been much worse.

I also think the actualitee is he a a total cuntinfact. caught with his hand in the till with deceipt and dropped from government more than once.

[porca misèria]

Seeing as this thread was started partly as a stealth inflation thread, you could at least be polite.

Of course QE is working.

But if I'd entitled the thread "Why is QE not creating Hyp*r Infl*tion", we'd have been in the Economics sub forum before you could shout "Censored"...

It's not creating anything.

It's filling a void created by high off-balance-sheet inflation in the bubble years.

[Neil B]

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?

They arent hoarding it - they are lending to each other, businesses and public who can afford it. QE isnt meant to be used as free for all credit like we have had for the last 10 years (that got us into this mess).

[Lone_Twin]

I'm sorry I don't know but your question does raise another... why not lend directly from the BoE to businesses/industry at low rates? When a business goes out to spend, i.e. purchase goods and services etc. this money it would in turn have to be deposited somewhere, i.e. a bank. Doing this would would require the banks to act in a responsible and commercial way in order to win the business from industry. They could then, of course, go on to sure up their balances etc. but they would have to behave competitively rather than just hoarding the cash instead. Wouldn't rearranging the chain of money supply from

[boE > banks > business] (doesn't work as money doesn't leave from banks)

to

[boE > business > banks > business again (hopefully)]

break the deadlock we're in now?

Would this work? Even in theory? Or am I missing something?

In my personal opinion this was never about "helping business" except as a by-product of saving the banks / handing them the keys to our @rses.

The banks are benefiting as they are closest to the source of the money. All new money comes out into the economy via them (it is after all their sh1tty assets being bought with the new cash) so they are in the best position to cream it off.

By the time it filters down to you and me it's scraps.

Save the banks / financial "industry" at all costs was the only rule in the game. But you knew that.

[Bloo Loo]

They arent hoarding it - they are lending to each other, businesses and public who can afford it. QE isnt meant to be used as free for all credit like we have had for the last 10 years (that got us into this mess).

if that were the case then where is the massive lending and cheap money for business?

lending is DOWN DOWN DOWN.

not only that, Merv has pledged to TAKE IT BACK when the economy recovers.

cant see banks clawing back 125bn in 10 year debt at 5 years from now very easily...can you?

[Timm]

Perhaps they are spending the QE on buying houses from borrowers in difficulty.

As the borrower then gives them back the money to pay off the debt, this would mean they had shored up their balance sheet and aquired a new asset.

Nice.

[Willy Weasel]

if that were the case then where is the massive lending and cheap money for business?

lending is DOWN DOWN DOWN.

not only that, Merv has pledged to TAKE IT BACK when the economy recovers.

cant see banks clawing back 125bn in 10 year debt at 5 years from now very easily...can you?

Unfortunately, you cannot have a situation where major overseas lenders completely withdraw from the domestic market and expect lending to stay at the same levels - no matter how much 'stimulus' you provide to domestic lenders.

[mdman]

You may as well ask why leeches don't cure cancer

Debtors who invoke Keynes have a win win

- if we never did it, things would be worse

- if it doesn't work, that means we need to do more (eg than Japan)

The facts of life are Austrian

[Bloo Loo]

Unfortunately, you cannot have a situation where major overseas lenders completely withdraw from the domestic market and expect lending to stay at the same levels - no matter how much 'stimulus' you provide to domestic lenders.

youve lost me.

which major overseas lenders?

[the_austrian]

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?

The "problem" (and I'm pretty sure it was the same in Japan, but not certain) is that the money has been used to buy Gilts which means you don't get any change in prices because you have taken something out of the economy that affects prices in the same way.