What is Quantitative Easing? Does it Just Refinance The Banks?

I hope someone can help with explaining exactly what quantitative easing is all about; and honestly say what the Bank of England really wants to achieve.

As I understand it, the formal line is the Bank of England (aka a Government Quango) is going to set about buying up gilts and other government assets from banks, in the hope that this can encourage further lending, so encouraging further consumer spending and helping avert a recession.

The claim is that this is not inflationary as eventually all the half a trillion pounds of Government assets (they’ll get there soon enough) they buy in assets will be sold back onto the market in future.

All this ready cash the big banks will then have will then be lent to businesses, homeowners, credit card punters and so forth and we’ll buy our way out of recession.

Clear so far? Not to me.

  1. First of all the banks are not lending to homeowners, small businesses or anyone else; and they are quite likely to just hoard this liquidity on the balance sheets anyway. If they do lend, it will be to safe blue chip companies.
  2. Second, Big Dave Cameron has just told us all to pay off our credit card debt and stop spending.
  3. Thirdly, Europe is about to be bust and the banks are going to be told to recapitalise even further.
  4. Fourthly, Big Merv King is talking down the economy so much, everyone will need to turn to prozac. Moreover, he is also saying small business does not matter as it is such a small part of the economy.

So is this just another recapitalisation of the banks?

Possibly. I am not a conspiracy theorist, mostly as Government and the Corporations can’t run a piss up in a brewery, let alone a complex financial scam.

My take on this is the following:

  • I think quantitative easing may save some banks again.
  • I think that consumer spending and the economy will not be helped by it at all.
  • I think it will be inflationary.

As a consequence savers (mostly the old) will suffer badly, but those of us with mortgages and ongoing liquidity may benefit in the long run, as our lending shrinks in real terms. Most of all, the Government’s lending will shrink in real terms as well and this will enable the borrowing cycle to continue.

Sadly I do not that that small, medium or bug business will ultimately benefit like this, especially if we continue to over-regulate employing people and running a business; and if we over-regulate the bankers as well.

In the mean time, with precious few other tools in the economists’ armoury, how is our economy going to thrive? Is this the right thing to try anyway, notwithstanding all of the above?

What does anyone else think?

What do you think?