Monday, 10 October 2011

Quantitative WHAT?!

What is 'quantitative easing'?

Def: Quantitative easing was proposed in 2008 as a way of providing an additional monetary stimulus to reduce the impact of recession. Interest rates had already been reduced as far as they could be, and banks were still finding it difficult to maintain lending. Early in 2009, the Bank of England began buying bills and bonds, exchanging them for cash which would increase bank deposits. This has the effect of increasing the money supply and giving banks more liquidity. Many other central banks implemented similar policies at the same time. (In the US it is called credit easing.)

This is sometimes described as printing money and, if carried too far, it could lead eventually to inflation. But at the time it was introduced there was a significant risk of deflation occurring, which could turn out to be even more problematic.


Look at this interactive graphic!

Quantitative easing is a government monetary policy occasionally used to increase the money supply it increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity. Under this policy, the authorities buy up bonds either from banks or from the commercial sector. There are two potential benefits. The higher the price of a bond, the lower the interest rate the borrower has to pay; so the "yield" – the interest rate – on government bonds falls. Since many interest rates, including mortgage rates for example, are set with reference to gilt yields, QE should therefore help to drive down borrowing costs. Investors are likely to use the extra money from QE to buy something else – shares, for example. That should push up the price of a whole range of assets, boosting wealth and creating demand right across the economy.

Did it work? Will it work? The Bank of England recently published research suggesting that the initial £200bn bout of QE, starting in 2009, boosted GDP by around 1.5 percentage points – though given that the UK still experienced its worst recession in living memory, it was hard to feel the benefit at the time. But other economists, argue that QE1 – combined with the effect of a much larger programme of asset purchases in the US – just handed banks lots of extra money which they used to speculate on commodities such as oil, boosting their price, pushing up inflation and making life even harder for cash-strapped consumers. 

The chancellor, George Osborne, said at the conference in Manchester that the Treasury was drawing up measures to increase the supply of credit to small and medium-sized businesses, which have repeatedly complained that they are missing out on loans from the crisis-hit banks. Ed Balls will gleefully remind Osborne that while in opposition, he described QE as "the last resort of desperate governments".

In my opinion, quantitative easing is not the best way of helping the economy, because the 'printed money' will be 'lost in the banks' and there will be no significant credit easing. There are more efficient, direct ways of creating growth, e.g. creating new jobs and investing in job bureaus.

That's what I think, 


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