The hidden cost of quantitative easing

QE has been the right thing to do.  Despite the sluggish recovery, things could be far worse. But it has probably increased inequality, which lumps the government with a future bill – if you believe that inequality is something that comes with real social costs, upon which there is fairly broad agreement.

I have fun imagining what Darling might have said a year ago:

So today I announce steps that will shore up the profits of banks everywhere – whether taxpayer-owned or not, foreign or domestic. We will make borrowing so cheap that a trained ape could mint billions. Yes, this will mean massive bonuses for the undeserving . . . But, Mr Speaker, this is not enough. Indebted homeowners need a break, or they risk dragging us down with them. So today we announce steps that will reverse the fall in house prices and lower the cost of the mortgages. If you own a big London house, I promise to you that the government is listening. You are at the front of the queue.

Have fun.


11 thoughts on “In the Guardian today: me

  1. I think we agree that QE has acted to avoid depression at the cost of bailing out the wealthy.

    But I fundamentally disagree that austerity is necessary, because governments while it may be conventional, it is not necessary for governments to borrow to invest or spend.

    Governments delegated the power of credit creation to private banks 300 years ago, and there is no reason at all – other than a false ideology – why a banking profession should not manage public credit creation and its use for investment in productive assets under the supervision of a monetary authority.

    Public credit creation is self evidently LESS inflationary than private, since it strips out excessive management costs, and unnecessary payments to the providers of the capital underpinning private credit.

    Ironically, it is now in the interests of banks to take this road, as they could probably make a better return on the capital that Is necessary for operating costs.

    1. Chris

      I have yet to get my head round your views on credit creation. But I bet there is a lot of precedent in the world to utterly refute your somewhat Panglossian account of how public investment works

      “Public credit creation is self evidently LESS inflationary than private, since it strips out excessive management costs, and unnecessary payments to the providers of the capital underpinning private credit.’

      Read John Kay’s account of the Magnox reactors, in ‘The truth about markets’. If only it were so very obvious that public sector investment works so beautifully. To my mind, that begs the question. We have a genuine trade-off between the reliability and inefficiency of psi

      1. Giles

        I am no defender of public investment as practised hitherto.

        But although the French (for instance) may not agree, it is not necessary for public investment of public credit to be managed by the State.

        I don’t think (and the Magnox precedent you cite is a good one) that the State as currently configured can be trusted to manage credit creation for investment. It demonstrably cannot.

        But with respect, I have been working for 25 years in the development and regulation of markets and business, including six years as a director of a global energy exchange. Based upon this experience, and recent R & D funded by the Norwegian government, I think I have some understanding of legal and financial structures, and particularly of innovative partnership-based enterprise models now emerging internationally.

        My point is that credit intermediation – as opposed to credit management as service provision – is not only withering on the vine because of a systemic shortage of capital, but is obsolescent in a world of direct instantaneous internet connections.

      2. I think that sounds really interesting. I do take your views seriously – and I am a fan of new enterprise models. Whether they can be rolled out quickly in a macroeconomic crisis is another thing; i face a media interview later and need to be careful that I don’t think ‘credit easing’ can be just rolled out of a box.


  2. sorry if the following betrays my too-quick reading … are you attributing the recovering in stocks, house prices, etc. to QE? and then looking at who owns those assets? Is that the gist? How do you know how much of these asset price increases to attribute to QE?

    1. Luis

      Very reasonable point, and I do caveat myself very much in the report. Though the consensus on housing prices was fairly uniform at the beginning of 2009; Halifax and Nationwide were so nervous about calling another 15% fall that they just went silent.

      We don’t know, of course. But you have to think that global liquidity conditions (the quasi-QE of the EU, the real version in the US) must have done something. The money has gone somewhere… But even if you give it only half the credit, it is a lot

      1. mmm, I think this is really tricky stuff. I’ll try to explain why:

        Changes in asset prices affect the better off (those who own assets) by definition.

        Asset prices collapsed because everybody expected economic Armageddon and/or a bubble burst. At this point, anything that avoids Armageddon is going to “benefit the rich” to the extent it causes asset prices to recover.

        If you look solely at changes in asset prices as your measure of who has benefited from any given intervention, and ignore, say, the generational effects upon swathes of the population, of higher unemployment and fewer/worse public services from a prolonged depression, I think you are rigging your assessment of the distributional impact of any given intervention before you’ve started.

        Now imagine the government responded to the crisis by printing money and transferring £5000 into the hands of the poorest quarter of households, and this has sufficient impact on aggregate demand to turn around the economy and change expectations of the future from Armageddon to recovery.

        In this (unrealistic) scenario, would you still be saying that the money put into the pockets of the poor has “actually” ended up in the pockets of the wealthy because they benefited from the bounce-back in asset prices that accompanied the change in expectations? If not, what makes you able to say that about QE?

        So even without worrying about the problem of what to attribute the recovery in asset prices to (perhaps it was fickle animal spirits or whatever) I’ve got concerns. Then again, I haven’t thought about this for nearly as long as you have!

        Or do you have in mind something more mechanical, as suggested by the phrase “the money has got to go somewhere”? Because more money can “go” in the real economy, simply if velocity slows (YP=MV) and increases in high powered money can be absorbed by contraction in the money multiplier. And I don’t really understand how money would “go” into higher asset prices, because every £ spent by a buyer is a £ taken away by a seller. But I readily admit I just don’t understand the relationship between asset prices and the quantity of money.

        having written all this, I don’t mean to deny that QE has helped bankers (which is a feature as well as a bug) this account of how trained apes can make money in this environment might interest you.

        I should spend more time reading your report and less writing blog comments. Scratch that, I should be doing neither and working.

      2. No, I concede that the method is very mechanistic. After all, #200bn was ‘printed’ – assets went up by 1.5 trn or something like that. Clearly it is not like allocating a fiscal transfer, and my method does so.

        I think – again laying exact causality aside – all I am wanting to draw attention to is the change in the circumstances of everyone as a result of how things panned out in 2009. 2009 was a better year if you had assets than if not, and I think that was to a great degree down to QE. Yes, the rest also benefited from impossible to measure avoidance of dreadful counterfactuals.

        On the whole, I think there was a lot of benefit, but all you hear is a lot of whinging about the debt, because that is the easiest thing to count of all.

  3. yes I’m getting very muddled – especially what I wrote about money “going” into asset prices – after all, we talk about printing money translating into higher prices (inflation) and the fact every buyer is accompanied by a seller is neither here nor there. Printing money and throwing it around has stimulated asset prices; simple as that.

    I take your point about 2009 being a better year if you owned assets than not, and that QE was part of why … and your point about the perception in some quarters that “it has only been welfare recipients and mythical hordes of public sector bureaucrats” who have benefited. I’m a bit worried about your point may be received as “QE has benefited the rich (and not the poor)” but I know that’s not your point.

  4. Not having QE would have increased income inequality as more people would have lost their jobs.

    That still leaves the question as to whether there was an equally easy -to-turn-on alternative to QE with the same beneficial effects but with less of the bad?

    And if some of the wrong people have benefitted from QE then that doesn’t necessarily make it a bad thing. Practical alternatives may have been worse, and better alternatives impractical on the time scale required.

    We certainly need this kind of analysis to learn lessons for the future. While the recesssion has been deep, it has not had quite as bad an effect as most feared. That does suggest that QE has been progressive, but were there better remedies?

    But it does suggest that we should look at ways of making QE gainers contribute to the costs of recovery in other ways – anyone for a mansion tax?

  5. The chaser to any discussion of QE is ‘how long do you think it should last and at what level?’

    Or, as I’d phrase it: is it time ease up on Quantative Easing or should we cut it out altogether?

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