There is a widespread belief that the Bank of England’s QE only benefited banks. Promoters of Jeremy Corbyn’s “People’s QE” use the strapline “QE for the people, not for banks”, and describe conventional QE as “bankers’ QE”.
So is this true? Did QE primarily benefit banks?
The Bank of England’s QE programme did not purchase gilts directly from banks, but from non-banks – pension funds, insurance companies, asset managers, high net worth individuals. However, because the Bank of England does not deal directly with non-banks, banks intermediated QE purchases. Banks bought gilts from investors, and sold those gilts to the Bank of England. Customer deposits increased as a consequence of the banks’ gilt purchases: bank reserves increased as a consequence of the banks’ gilt sales. The end result was a vast increase in both base money M0 (bank reserves) and broad money M1 (customer deposits).
Because QE has vastly increased bank reserves, many people are angry that banks have cut back lending severely since the 2008 financial crisis. What is the point of giving banks all this money if they don’t lend it out? But banks . They , either. Throwing money at banks doesn’t make them lend. The extra money that landed on bank balance sheets left them with far more reserves than they needed to settle payments, but made no difference to lending.
The Bank of England at base rate ("bank rate"), currently 0.5%. Some people say that this is in effect paying banks not to lend, and blame this payment for the fall in bank lending. But this is mistaken. Banks collectively have no choice but to hold the extra reserves created by the Bank of England through QE. When investors spend the proceeds of QE on other assets, such as corporate bonds, equities and commodities, the money simply moves from one bank to another. QE money does not leave the banking system unless it is converted into physical notes & coins.
But do banks benefit from interest on reserves? Slightly, since they pay less than 0.5% on demand deposits. But against this should be set the opportunity cost. If they did not hold so many reserves, what would they hold instead?
Banks must hold sufficient safe liquid assets to meet liquidity buffer requirements, which have increased considerably since 2008. The safest and most liquid assets are reserves, but there are substitutes such as Treasury bills and gilts. Banks' holdings of gilts have actually risen since 2008.
But for banks to earn money, they must do riskier lending. A few basis points spread between customer deposits and reserves or T-bills isn’t going to satisfy their shareholders. Far from discouraging risky lending, therefore, the presence of excess low-earning assets on bank balance sheets should encourage it. If banks aren’t lending, therefore, other factors are at play – such as depressed consumer demand and a very large private sector debt overhang.
The main effects of QE are to support asset prices and depress longer- term interest rates. So banks with balance sheets stuffed full of poorly-performing loans collateralised by risky assets undoubtedly benefited from QE, because it prevented wholesale destruction of their balance sheets through sharply falling asset prices and swathes of household and corporate bankruptcies. But although QE helped keep banks alive, it has made it far more difficult for them to return to profit. When interest rates are close to zero and yield curves are flat, banks can’t make money.
All in all, it is hard to see that QE could fairly be described as “QE for banks”. But if banks were not the main beneficiaries, who were? In 2013, the Bank of England the principal beneficiaries were asset holders, particularly those in the top 5% of the income distribution:
By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.
Rich people, in other words. So conventional QE is QE “for the people”. Just not the people that Jeremy Corbyn would like to help.
Of course the Bank of England argued that conventional QE actually benefited everyone:
Without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. Many more companies would have gone out of business. This would have had a significant detrimental impact on savers and pensioners along with every other group in our society. All assessments of the effect of asset purchases must be seen in that light.
Those who suffered years of unemployment, under-employment and depressed real incomes might regard this as cold comfort. Would direct reflation of the economy through a , “”, and/or a money-financed investment programme have worked better? I am one of many who think that it would. When asset prices are in freefall and the economy is collapsing, conventional QE works: but when the problem is lack of demand due to damaged bank and household balance sheets, conventional QE is inadequate.
We have relied far too much on conventional QE. Whether it has helped restore the UK’s fortunes we do not know. But we do know that further reflation of the economy is not at present needed: the debate at the moment is when to raise interest rates, not whether to do more QE. We need investment, yes, but while interest rates remain low we can have this at little cost. To my mind the attention of the new Labour leadership should be elsewhere.
For too long we have turned a blind eye to QE's regressive nature. Surely the top priority now must be to address the inequality that "QE for the rich" has helped to cause.