When Labour first embarked on Quantitative Easing I was uneasy. My preference was for them to mend the commercial banks quickly. Indeed, my prior preference had been not to damage them so much in the first place. If they had mended or not damaged the commercial banks through their wild monetary and regulatory policies, swinging from too hot to too cold too abruptly, we would not have had to consider QE.
If the commercial banks had been buttressed swiftly – preferably in ways which left the original shareholders and senior executives with their losses, and the taxpayer with contingent guarantees or remunerated loans – we would not have needed QE. Instead, buying shares in the banks and then demanding they held much more capital meant painful surgery and a long delay before those banks could help finance a recovery.
Quantitative easing was very much a second best policy. It achieved something, but it also has lots of side effects which are difficult to handle. The main aim of a QE programme is to drive down long term interest rates, in the hope that then more people and businesses will invest and borrow. The programmes surely drove down the rate, but all the time banks are under a regulatory cosh to raise more capital, and all the time markets are hesitant about the future, not a lot of long term borrowing and investment takes place.
The secondary aim of a QE programme is to get people to take more risk. This again did work. By definition the individual investors and the investment funds that sold bonds to the Central banks, usually bought riskier shares with the money. Some of this money found its way into hands that would create new investments, and the stock markets were able to raise some money for companies in need of it.
The main side affect of the QE programmes has been to enrich the holders of bonds and shares by raising prices substantially. This has been most noticeable in US shares and in some continental European government bonds. The late and large ECB programme has already driven bond yields to crazy levels in Germany. Anyone lending to the German government for any time period up to nine years has to pay the German government for the privilege of lending to it!
Successive programmes of QE in Japan have not proved to be inflationary in terms of general prices, though there too they have proved inflationary for the prices of bonds and shares. It is a reminder that if there remain problems in the commercial banks, and if a society is determined to save more and spend less, QE does not solve all the problems.
QE mainly enriches the state. It allows governments to spend and borrow more at surprisingly low cost. It also gives a bonus to savers who own financial assets, but they need the capital gains to offset the loss of savings income, given how low the interest rates go.