The question above has been posed this morning by Paul Marshall of Marshall Wace in the Financial Times. He quickly addresses one of the themes of this website.
Quantitative Easing, as this policy is known, has bailed out bonus-happy banks and made the rich richer.
In essence his argument revolves around what is called the portfolio effect which he describes as follows.
The second is to stimulate what they call the “portfolio channel” via the purchase of sovereign bonds. Government bonds provide the risk-free rate for financial markets, off which everything else is priced. If you suppress the risk-free rate by buying debt, you boost the price of all other assets, from credit to equities to property.
Okay so who are the beneficiaries?
Banks have been the biggest beneficiaries, with their 20- or 30-times leveraged balance sheets.
This is a familiar theme on here and he carries on.
Asset managers and hedge funds have benefited, too. Owners of property have made out like bandits. In fact, anyone with assets has grown much richer.
In theme with the times he makes a nod to the advent of what is called Corbynomics by suggesting a solution to this.
QE had clear wealth effects, which could have been offset by fiscal measures.
What evidence is there for this?
The problem is that there has been a wave of monetary loosening by central banks which I shall illustrate by just looking at my home country the UK. The Bank of England cut interest-rates to an “emergency” – yes that went into my financial lexicon for these times a while ago!- 0.5% from 5%, it has undertaken some £375 billion of QE which it has been extending this week and then in July 2012 it launched the Funding for (Mortgage) Lending Scheme. The first two are common among central banks but the third (FLS) has seen different versions abroad. For example the European Central Bank has had two past efforts and a present one of 104 billion Euros and counting at buying covered bonds to support banks and the mortgage market.
So if we look at what has been the major subject on here in recent days which has been property markets we see that in the UK the QE effort may have stabilised them but it did not drive them higher. So we are in that murky counterfactual world where we suspect that otherwise they would have fallen maybe sharply but we will never know. Also at that point we were seeing both much lower interest-rates and QE. The UK property boom however which has come since was driven by the advent of FLS. Accordingly you could easily argue that in the UK it was FLS that made property investors and at least some of the rich richer.
Let me spell that out. If we assume that it takes a year for a policy to have an effect then QE impacted the UK property market in March 2010 when it was 172.8 (ONS) and two years later it was 172.6. Not much wealth effect there! However if we do the same for FLS we see 185 rise to 216.9 in two years or 17%. I fear to do the numbers for London which of course is where many of the richest live. Also I think that FLS may have acted more quickly and you could argue for an even larger effect but however you argue it the song is “Get The Message” by Electronic.
What does the Bank of England think?
Remember the phrase “Never believe anything until it is officially denied” from Jim Hacker or Otto Von Bismarck?
And QE is not about giving money to banks.
In terms of specifics then the Bank of England did agree with the rich getting richer theme. From 2011.
This shifts the excess money balances to the sellers of those assets who may, in turn, attempt to rebalance their portfolios by buying further assets — and so on. This process will raise the prices of assets…As asset portfolios are rebalanced, asset prices are bid up until equilibrium in money and asset markets is restored.
So what happened next after QE began?
Table B and Chart 8 show that, over a longer period from March 2009 to May 2010, there were sustained rises in asset prices…..There is considerable uncertainty about the effect on equity prices and the immediate market reaction is unlikely to provide an accurate guide, but an estimated portfolio balance model would suggest an impact of around 20%
As well as the implicit effect from the overall economic boost.
this would suggest that QE may have raised the level of real GDP by 11/2% to 2% and increased inflation by between 3/4% to 1 1/2% percentage points.
How is this distributed?
It is intriguing how the debate has returned to this subject in September 2015 as the Bank of England was plainly nervous on this subject back in July 2012. If you think that this was the starting point for FLS then this may be the most significant month in its policy operations in terms of actual effect. After all the UK economy and housing market then began their boom phase. However after some unsubstantiated QE hype as a diversionary tactic it told us this.
In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.
Then it drops its bombshell. In Twitterspeak Boom!
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.
Indeed the Bank of England had a go at estimating the total gain.
that would give an estimate of the total increase in household wealth stemming from the Bank’s £325 billion of asset purchases up to May 2012 of just over £600 billion, equivalent to around £10,000 per person if assets were evenly distributed across the population.
But of course it does not work out at £10,000 each.
the top 5% of households held an average of £175,000 of gross assets (Chart 4), or around 40% of the financial assets of the household sector as a whole.
I wonder what the top 1% held and even more so what the top 0.1% held?!
Paul Marshall points out this.
In the UK, QE increased the money supply by £375bn, or about £5,800 per person.
He then gives an implied criticism of it.
If this money had been distributed evenly it might have been frittered away on consumption rather than making a few rich people richer and bailing out the banks.
Those spending it might not agree with the word frittered but now look at the Bank of England’s claimed gains from QE.
Assuming that the additional £125 billion of purchases made between October 2011 and May 2012 had the same proportionate impact, this would translate into an impact from the £325 billion of completed purchases to date of roughly £500-£800 per person in aggregate. (Another £50 billion was later added).
What happened to the missing £5000 per head? 😦
One of the awkward aspects of the QE era is how much is still not know about it. If we look at it on its own then the only version which appeared to have some success was in the United States but this of course included pumping up the housing market via that purchase of huge amounts of Mortgage Backed Securities (MBS’s). However we do know that it has coincided with a surge in asset prices around the world. Some care is needed as for example the property boom in the UK required the FLS scheme too for it to really get the party started. So we are in fact observing a wide range of monetary easing including lower interest-rates apparently to infinity and beyond as well as specific measures. Also we have to acknowledge the impact of what became called the “Greenspan Put” where it is believed by many that central banks will not let equity and maybe property markets fall.
If we look at the United States it may not be just in wealth that the rich have got richer. Last week I looked at the Census Bureau data which showed that the best performing group in income terms since the credit crunch was the top 5%.
As to the banks the picture is also complex as they have ended up with reserves at the central bank earning very little. You will see many complaints about this! However they have also benefited from many schemes and in terms of interest-rates they apply have been able in some areas to never reduce them such as the ones on many credit cards. In fact I notice a recent trend where they are rising unlike the actual Bank Rate.
Oh and to avoid clogging up the issue I have avoided discussing when central banks have explicitly done this by buying equities and property in the case of the Bank of Japan and buying equities (famously Apple) in the case of the Swiss National Bank.