QE was not about saving the banks

WHAT has quantitative easing (QE) done for us? Regular readers may be aware that your blogger is not the greatest fan of QE. But it should be criticised for the right reasons, not the wrong ones. It was not, as John McDonnell, the finance spokesman of Britain’s Labour party said on BBC Radio 4 today, about “saving the banks”.

QE was adopted in 2009 because central banks were running out of options. Short-term interest rates had been cut close to zero; it is hard to impose negative rates in an economy where consumers and businesses can hold physical cash (but see Andy Haldane’s recent suggestion).  So the central banks decided to drive down long-term interest rates by buying bonds; when it did so, it credited the account of the seller with newly-created money. The aim, by reducing long-term yields, was to reduce the cost of borrowing for companies and households (through the mortgage market).

In the main, central banks bought government bonds but the Federal…Continue reading]]>


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