Quantitative easing is expensive. But has it worked?
When the recession is over, the great debate will not be on what caused it – there is no great argument on that – but on whether quantitative easing helped end it.
If this Bank of England policy of buying up debt is thought to have worked, there will be calls to use it again every time Britain faces the possibility of downturn. But despite spending nearly £125bn there is no clear evidence of whether QE is making any difference to the economy.
The merits of the 2009 QE programme will form the basis for learned theses from academic economists for the next generation. QE has never been attempted before in Britain, so the results of this experiment will be based on a sample of one.
Put simply, QE involves the central bank using imaginary money to buy government gilts and corporate debt from banks, freeing their reserves so that they can increase lending to companies that will boost the economy.
In practice, some of the debt is being sold by foreign banks or institutional investors that will not use the liquidity to boost lending and even the UK banks will not necessarily used their freed capital to lend to firms for creating jobs or other beneficial uses. Some new UK corporate lending may replace borrowing from abroad.
Without a control experiment it is impossible to say if the economy would have fared better or worse without QE, but it is also impossible to say if it has fuelled inflation, as critics of “printing money” fear.
The biggest fan of QE was the Bank of England when it was announced in February 2009 but there are signs it is now having doubts about the effect. It chose in July not to increase the programme to £150bn and it admits it is now “watching and observing” how it works, suggesting the bond-buying spree is over.
Such comments inevitably caused bond prices to tumble. Without the QE programme, the main buyer of bonds is out of the market. Worse, as it unwinds the programme the Bank has to sell that £125bn of stock and that will cause prices to fall further.
QE thus looks like costing the Bank – ie, the country’s taxpayers – money. The one measurable part of this programme may be the difference between the amount spent on bonds and the price at which they are subsequently sold. Without an accurate quantification of the benefit from QE, that multi-billion financial loss may be enough to prevent calls to repeat the medicine next time the economy catches a cold.
