Monday, October 5, 2009
At last! Negative quantitative easing!
As Prof WIllem Buiter explained, QE is a smokescreen, all that happens is that banks "sell" gilts to the BoE and are credited with a balance with the BoE. The FSA, in its infinite wisdom is now going to reverse that, banks will have to buy back those very same government bonds, and as their most easily accessible form of cash is their balances with the BoE, that is what they will use up first. The article reckons this will reduce the amount that banks can lend (which is theoretically possible, but as QE did not increase the amount that they lent, there's no automatic reason to assume that negative QE will reduce it). It's a pity that nobody seems to understand the difference between "assets" and "liabilities" any more (I avoid the word "reserves" because that can refer to either).