Have central banks made the rich richer?

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?!

Number Crunching

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.

28 thoughts on “Have central banks made the rich richer?

  1. Hello Shaun,

    So the the effect of stopping a 1930’s style depression has been inflation in assets of all kinds

    Good job we dont measure those for inflation

    otherwise they’d have to do something about it


  2. “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.”

    Whoa ! wasnt QE used to buy assets that are/were imaginary ?

    thats not frittered but a crime ?


    a few rich people richer – did not help the economy

    bailing out the banks – did not help the economy

    consumption – might have done

    HMG 375 billion on capital projects certainly would have done


    Ps: plenty for making a popcorn factory 🙂

    • Hi Forbin

      That sentence caught my eye which is why I put it in. Firstly some people could have badly done with the money and secondly as you point out exactly what has QE as it stands achieved? The version of QE for people or PPI did give part of the economy a boost via car sales and the like.

      As to the commodity complex the news this week has been the plummet in Dr.Copper yesterday as we wait to see the next move in corn.

  3. Hi Shaun
    Accelerating gains of capital over labour. Next NIRP and abandonment of cash.
    I really hoped the Fed would break the cycle, but unless they knew that VW was coming , I am beginnning to fear we have stepped over the edge.

    • Hi therrawbuzzin

      I have much more sympathy with the first efforts of QE so in UK terms the first £75 billion of the current £375 billion total. There was genuine fear back then although as someone who had been following events in Japan I had little faith it would have much of an impact in the UK except on inflation The latter £300 billion is a matter for the conscience of those who voted for it.

      • Quantitative Easing is not a new economic tool, (even if the actual name is) yet, until the banks were in danger, its use was never even considered in UK, despite all the previous recessions we’ve endured.

  4. Hi Shaun

    Thanks for this; an interesting piece.

    I see above that the increase in financial assets excludes pension funds. Now correct me if I’m wrong but I understand that QE is related to ZIRP via the asset purchases having a higher bid (which is a higher price) the obverse of which is the (lower) interest rate; so QE is directly related to the lower interest rates we have had.

    Now QE may have boosted the value of pension assets but ZIRP has reduced quite substantially the amount of future income this will buy. I realise that this is due in part to other factors such as increasing longevity but the income which you can buy with an annuity in 2015 is only one quarter of the figure of 2000. Now the fund may have gone up substantially but the amount you have to set aside to achieve the same real income of say ten years ago has gone up very substantially indeed and I wonder how these things play out. I suspect this may be quite a substantial offset to the distributional effects you mention. Of course it affects everyone and not just the top 5% but it is likely that they will have much higher pension assets than those below.

    As you imply pumping up house prices is now official whether from FLS, HTB et al.

    • just waiting for my 400,000 house to be worth , what 400million ? 4 billion

      Now I know what the Italians felt like with the Lira


      Inflation ? what inflation ? BoE does its Lord Nelson trick …..

    • Quite right Bob J, people will end up asset rich but income/cash flow poor. The Government recognises this so liberalises the pension system enabling them to sell their pension portfolio to augment their falling income, Oh and along the way the Government hopes to sting them with a nice big tax bill too.

      Quite who is going to be left buy these assets I don’t know.

    • Hi Bob J

      I see you have a few replies already but wanted to add that those who had final salary pensions such as former Bank of England Governor Mervyn King saw the value balloon. Also it was possible to convert such a scheme (within limits) back to cash value if you wanted too and to monetise it.

  5. Excellent piece Shaun.
    I can understand that these policies may have been desired to maintain some short-term stability, especially with regard to asset values and bank balance sheets, and I’m convinced that these are deliberate consquences rather than accidental; but it does now need some effort from the BoE and govt to understand the long-term implications – the generational effects are already being felt, but what will the picture look like when the generation that can’t buy a home now come to retirement? Will assets by owned by a smaller and smaller sub-section of society? Can household debt continue to rise?

    • and here we go

      but what will the picture look like when the generation that can’t buy a home now come to retirement?

      A- they are up the creek – and for the next government to sort out , not this lot, as they don’t care because they’re all right jack

      Will assets be owned by a smaller and smaller sub-section of society?

      A- inevitable really – Read Dune , just make sure you have assets 🙂

      Can household debt continue to rise?

      A- short term inevitable , medium term – so long as it goes bust on the next guy’s watch who cares ? It will their fault you see

      Depressing ? come ,join me on the sofa, have some popcorn ….


      • As you pose the question:”can household debt continue to rise?” Like you I think there has to be a limit; and then what? I think it will collapse and being a Ponzi collapse is the right word; there is no steady deflation.

  6. “but an estimated portfolio balance model would suggest an impact of around 20%” Ha ha ha ha, funny that, I seem to remember making 93.2% between those dates! Actually I know I made it cos I just checked my old returns. I don’t think I was unusual and I can’t see that the “normal market” mis-priced by 70 odd percent – the CB gaming continues.

    The Bank even contradicts itself later when saying “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” – and gilts have increased by more than any 20% (the amount they say a portfolio, presumably of equities, bonds and property increased by) so what’s all that about??

    I am clear on this Shaun – the types of QE undertaken boosts the housing market which in turn boosts the economy and thence equities. I know you doubt the “wealth effect” of higher house prices and in terms of selling your house and buying another one I agree but, I believe lots of people see the increased “value” of their house and promptly borrow against the extra equity, especially given the rates you can re-mortgage at and then go out and spend it.

    The Government knows this approach has failed to really move the economy hence the helicopter money disguised as Payment Protection Insurance compensation.

    • Hi Noo2

      I do not dispute that there is some wealth effect from higher house prices but much of what central bankers call wealth effects is in fact inflation. So it looks like a gain but as the consequences emerge we need more and the junkie culture cycle begins again with all the consequent problems (trade deficit etc..).

      Your last sentence raised a wry smile as we and others have discussed PPI as Helicopter Money but the responses to Corbynomics and the Citi plan suggest it has not reached the mainstream media and even some financial media.

    • I believe lots of people see the increased “value” of their house and promptly borrow against the extra equity, especially given the rates you can re-mortgage at and then go out and spend it.

      There’s a problem here, and it is this:
      Those of the boomer generation are all old enough to remember when mortgage interest rates were well into teen%ages, and would therefore be wary of mortgage equity release for trivial spending.
      They may be realising some of the value locked into their homes, but that’s more likely to be for either of two reasons:
      1) To help their children onto the property market.
      2) It is necessary to augment their income because of the drop in return from pensions/savings.

      People who are older than they, probably don’t need to withdraw equity from their homes, because their pensions are so good, and are less likely to indulge in frivolous spending anyway.

      That leaves those YOUNGER than the Boomer generation, and it is THEY who really benefit from Govt. policy.

      For you to be right, it is absolutely necessary for the “war between the generations” to be either a myth or a deliberate diversionary ploy.

      • The other thing they’ve spent on when releasing equity is a BTL (buy-to-let) property which has also helped to push up house prices especially for first-time buyers at the lower end of the market.

      • Your points are probably true but this does not stop the economy from benefiting – expenditure in whatever form is expenditure and I did point out that this in itself is insufficient to boost the economy hence the helicopter money. Your second point echoes my comment to Bob J further up in the comments section. Your last point I have mentioned yesterday in a post to Shaun here – https://notayesmanseconomics.wordpress.com/2015/09/18/the-bank-of-england-adds-some-dynamite-to-the-war-of-the-generations/#comments (second para of the 9th comment refers). I am stating plainly that the “war of generations” if you want to call it that has been ongoing certainly since the early 80’s when I was a youngster.

        The reason I don’t view it as a “war” is because as I said to Shaun the young nearly always have very little (barring inheritances) as they have not been working long. I remember those days! So this “war of generations” has always been ongoing, it’s nothing new.

        I bought my first house in 1987, had to stump up a 40% deposit because the bank would only lend 80% of value of the bricks and mortar excluding land value and ended up borrowing 2.5 times my salary at 7.5% pa, consuming 30% of my take home pay which then increased to 14.5% pa over the next 2 years, consuming 60% of my take home pay (I’d had approx 20% worth of pay rises in the interim). Almost lost the house but this is my point – plus ca change. The same situation applies today 26 years later only now instead of immense interest rates with relatively low prices it’s immense prices with low interest rates.
        I was scarred for life by the experience but plenty of friends who went through similar experiences shrugged it off a few years later in the late 90’s and went back to spend spend spend, so I disagree your point re cautiousness over further mortgages – most people have very short memories.

      • Oh and I forgot – YES the younger than boomer generation are benefiting from Govt policy – a third of my friends have done exactly what you speak of. When they heard their off spring were being offered 40 year mortgages to make the payment affordable they re mortgaged their own homes to release part of the equity and handed it over to their kids telling them it was an advance against their inheritance. Certainly im my experience the “war of generations” (in the sense of older parents not caring about their children’s financial plight and offering no help) is a myth.

  7. so the rich get richer through QE , they also get richer by the status quo…you could also say moron single mums get a more comfortable life through the continuation of a debt funded welfare state , so what , half a life, if you are not challanged and struggling you are not alive …there are still good opportunities in this country to move up the income ladder , most ‘poor’ people are lazy and stupid … those that arn’t are probably happy…It’s the middle class 40yrolds that lose because they own so little of their house , but those are the voters that chose the bullingdon boys to kick the can up the street , ….

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