The jury is still out on quantitative easing

November 16th, 2014 at 9:46 am by Lindsay Addie

With the 2014 mid-term election campaign in full swing in October the US Federal Reserve’s decision to ease back on its bond buying program (quantitative easing) didn’t receive the coverage it deserved by the media. So what is ‘quantitative easing (QE) and why is it used? The Economist explains:

When the crisis [GFC] struck, big central banks like the Fed and the Bank of England slashed their overnight interest-rates to boost the economy. But even cutting the rate as far as it could go, to almost zero, failed to spark recovery. Central banks therefore began experimenting with other tools to encourage banks to pump money into the economy. One of them was QE.

To carry out QE central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence “quantitative” easing. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans. The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment.

So how has QE worked in practice? This is strongly debated by economists with the Wall Journal having canvassed economists for their views on QE. Meanwhile Robert Samuelson over at Real Clear Politics is arguing why more research is necessary.

Take the “event studies.” They observe interest rates only during the first hours or days after a Fed bond-buying announcement. Over longer periods, interest rates may reverse course. On his blog, economist James Hamilton of the University of California, San Diego, says that rates on 10-year Treasury bonds actually rose during periods of Fed bond buying — the opposite of the goal. Whatever the Fed’s influence, he writes, it was overwhelmed by “developments beyond [its] control.”

Likewise, economic models may exaggerate the tendency of lower interest rates and higher stock prices to increase spending. Maybe the financial crisis has made people more cautious. The models may be outdated.

Some of the potential pitfalls of QE are discussed here in analysis by ECR Research. The Economist shares similar concerns.

Studies suggest that it did raise economic activity a bit. But some worry that the flood of cash has encouraged reckless financial behaviour and directed a firehose of money to emerging economies that cannot manage the cash. Others fear that when central banks sell the assets they have accumulated, interest rates will soar, choking off the recovery. Last spring, when the Fed first mooted the idea of tapering, interest rates around the world jumped and markets wobbled. Still others doubt that central banks have the capacity to keep inflation in check if the money they have created begins circulating more rapidly. Central bankers have been more cautious in using QE than they would have been in cutting interest rates, which could partly explain some countries’ slow recoveries.

The challenge for economists is to increase their knowledge of QE by developing more advanced modelling and measurement systems enabling QE to be further refined. As it stands not enough is known about its inner workings and how it influences economies.

Q is for quantitative easing

June 21st, 2014 at 4:00 pm by David Farrar

The NZ Initiative hits Q:

Those who read the business pages may have come across the term quantitative easing (QE), an apparently magical potent for reviving debt-ridden economies; almost like a shot of adrenaline in the arm of a dying patient.

Prior to QE, the orthodox medicine for monetary authorities to use to stimulate the economy was to lower interest rates on some form of official debt, such as the interest rate the central bank pays on overnight deposits, and/or increase liquidity in the banking system by buying back government term debt. The latter technique is called an open-market operation (OMO). In addition to its liquidity effect it will raise prices of term debt, lowering its yield. By either measure, the authorities can hope to make private credit cheaper, stimulating investment in businesses, housing and consumer durables.

QE’s most striking point of distinction from an OMO arises when it involves buying back privately-issued paper instead of government paper. (But note that some define QE to include buying longer-term government paper than is usually bought in the US in an OMO.)

Why would the authorities buy private paper, particularly paper of dubious value held by injudicious private banks, when there is no shortage of medium- and long-term government debt to buy? Why indeed.

In deciding what private securities to buy, government is favouring some issuers (eg those issuing mortgage-backed bonds) and some holders (eg banks) at the expense of others. It is also shifting private risks to taxpayers. The government could easily pay too much for those assets since its buying power is likely to bid up their prices. An unwanted effect might be to make imprudent banks stronger and taxpayers weaker (via government) through hidden subsidies.

Moreover, what happens when the monetary authorities subsequently decide that the additional liquidity needs to be reduced? Reversing the process by selling the accumulated private paper in large amounts could undesirably disrupt the primary issuance market (eg for mortgage lending).

One argument in the US in favour of QE (focused on buying private mortgage-related debt) is that the US suffered such disruption to this market in the global financial crash that special assistance is desirable to ‘unfreeze’ it. This argument may be more political than economic.

In conclusion, heavy recourse to QE is a sign of desperation – a bit like reaching for unproven fringe medical remedies in the belief that proven mainstream treatments can do no more.

That’s a very good academic summary of the idiocy that is quantitative easing. I prefer the John Clarke version.


Is this why the Greens backed quantitative easing?

November 21st, 2013 at 3:00 pm by David Farrar

Jeremy Warner at The Telegraph reports:

Bit late on this, but a report this week by the management consultancy McKinsey has attempted to quantify the distributional consequences of central bank asset purchases (so-called quantitative easing) which I referred to in my column this morning. Pretty terrifying reading it makes too, hammering home the point that QE has been extremely beneficial to indebted governments and other borrowers, but on the whole very damaging to households, particularly elderly ones reliant on fixed income forms of saving.

And further:

Most certainly the profligate have been bailed out at the expense of the thrifty, but it is not even clear that there is a net economic benefit from propping up the overborrowed. In the end, it may have been at best a zero sum game. More spending sustained among the overstretched has very possibly been cancelled out by less spending by those with the foresight to save.

QE has resulted in a massive transfer of wealth from households the governments.

Enables the Government to spend more by printing money, but households still end up paying for it.

A u-turn or not?

June 20th, 2013 at 6:44 am by David Farrar

“Hey Clint” was calling me a liar on Twitter yesterday because on Newstalk ZB last night I scoffed at (presumably his) the spin that the Greens had not done a u-turn on the printing money policy, ad I cited what Russel Norman said on Q+A. Clint is arguing their policy was a “proposal” which is different to a policy under the Green Party constitution.

This is a degree of subtltly that I am sure was lost on 99% of the public, and it seems even his own leader. Listen to this audio of him on with Susan Wood. She says to him “Why the backdown and change of heart” and he accepts the premise of the question – it is a backdown or u-turn.

And let’s look at the transcript of Q+A to see whether the average person listening would have taken this as a discussion document or a firm policy:

Well, today the Green Party’s releasing a proposal around the exchange rate.

So in Greenspeak, now when they propose something – that doesn’t mean they support it or it is a policy. It just means they want to talk about it.

SHANE                         So just so we’ve got it clear – you want the Reserve Bank to go out and print some new money to buy some earthquake bonds off the government. The government then would use that money to help with the Christchurch rebuild – help build the sewers and the streets and that type of thing – and also to go towards saving for our next disaster.

DR NORMAN              That’s right.

When your party’s finance spokesperson and co-leader says they want the reserve Bank to go out and print some new money, it is clearly a policy. It has been advocated by your most senior politician. Not a single person listening to Q+A would have taken this as something the Greens were not committed to. Arguing the dropping of it is not a u-turn is ridiculous and desperate spin.

Also Dr Norman himself has spent months on Twitter highlighting other countries doing QE, and lamenting NZ is not doing the same.

SHANE                         Can I ask you will Labour support this policy?

DR NORMAN              We have spoken to Labour and given them a heads-up about what we’re talking about today.

So Dr Norman doesn’t in any way say “No, no this is not a policy. It is only a discussion document”.

Yet for me pointing this out, a Green spin doctor calls me a liar. More Muldoonist smears.

Greens dump printing money plan – for now!

June 19th, 2013 at 11:10 am by David Farrar

Vernon Small reports:

The Greens have dumped their call for quantitative easing – or printing money – after it became an electoral liability for the party and a future Labour-led government.

Green co-leader Russel Norman yesterday confirmed the u-turn after Monday’s release of the joint Labour-Green-NZ First-Mana report into manufacturing left the policy out of the mix.

Prime Minister John Key and other Government ministers have latched on to the plan to ‘‘print money’’ to paint the Opposition as economically radical.

Norman said it was never Green policy but was included in a discussion paper, issued last October.

This suggests they were not advocating it. This is far from the reality. Russel Norman was constantly tweeting that we should be printing money, and providing examples of other countries that were doing so. There is no doubt that the Green’s proposed Finance Minister thinks we should be printing money. The only thing that has changed is they have agreed to stop talking about it in public.

But if a Labour/Green Government got into office, and couldn’t get the books to balance, what do you think is more likely – that they’ll cut spending or print money?

And enjoy Clark and Dawe as they explain what the Greens mean by quantitative easing!

How they plan to pay for their promises

March 14th, 2013 at 4:00 pm by David Farrar



This is the alternative. They honestly seem to believe that you can enrich a country by just printing more money. I thought this lunacy died out with Social Credit.

The only Western countries doing QE are those which have the official cash rate near zero and have run out of other options. No sensible country is advocating printing money in the circumstances NZ is in.

There is a difference between a last resort and a preferred option. As an analogy if someone is dying from blood loss through a severed limb then a tourniquet is your last resort to stop them dying. But if they have just cut their leg open a bit, you don’t apply a tourniquet as your first response because the impact of doing so is very nasty.

In monetary terms, the nasty impact is prices go up and up.

You can see the Twitter debate here.

Be scared, be very scared. Most Green policies will just be inefficient and waste money but not necessarily be hugely harmful. This one is different.

The winners and losers of quantitative easing

January 1st, 2013 at 3:00 pm by David Farrar

The Greens want NZ to print more money, on their orders. Labour wants the Reserve Bank to print more money – but on its own initiative under new targets they will set. So who are the wnners and losers from quantitative easing. The Telegraph reports:

Saga, the pensioner lobby group, has claimed that QE has contributed to a 9pc drop in real incomes among the over-50s since early 2008. And the Bank has conceded that the beneficiaries of QE have been the investor classes while those relying on income have suffered

So the victims of QE are pensioners and employees basically. So much for the left standing up for the working class!

So who does well out of QE?

Last year saw a resurgence of some of the biggest and best-known hedge funds in the world, according to the latest figures collected by HSBC.

Crispin Odey, the boss of Odey Asset Management, generated 26.6pc returns at the end of November, turning his flagship fund around from a heavy loss of 21pc in 2011. Lansdowne Partners, the London-based fund that correctly forecast the banking crisis in 2007, made 16pc on its $6bn equity diversified fund and 14.8pc on its global financial fund.

So QE is great for hedge funds. The currency speculators will also have a field day from speculating on exactly how many new dollars a left Government would print.

But how about aspiring home owners? Labour tells us they want more affordable housing.

The Bank has pumped £375bn of money into the economy since the start of its QE programme in 2009, while central banks in America and Japan have unleashed hundreds of billions of dollars in a radical global bid to jump-start the economy. The effect has been to boost the price of assets, from equities to houses, and reduce gilt yields, according to analysis by the Bank.

As someone who already owns a home and has a few equities, I could do very well out of QE. But couples saving for their first home are likely to get clobbered as their income will be devalued, and house prices will increase.

Greens literally believe money does grow on trees

October 8th, 2012 at 7:00 am by David Farrar

I thought this madness died with Social Credit, but Greens (and Labour may not be far behind) have said that they want the NZ Reserve Bank to effectively start printing money. They think that NZ printing more money is a good way to increase the relative value of the US dollar. We might as well start burning our savings.

Make no mistake, what they are calling for is the value of everyone’s savings to be reduce, as inflation takes off. You know all how they say wages are too low for low income workers? Well they want the cost of food, goods and services like electricity to increase faster than they have been.

There are basically two sorts of countries that print money. Those that are bankrupt, and those whose economies are so stalled that the central bank cash rate is as low as it can go.  In the US it is 0.25%. NZ is at 2.5% so a fair way away from that.

Russel Norman claimed:

Secondly, when you look overseas at the use of quantitative easing – because all of our major— most of our major trading partners are using it

This is simply wrong. The US and the the Eurozone and Japan have done it (and sort of the UK)  – again because they are almost bankrupt or their central rate can not be lowered anymore. But they are not our major trading partners.

Our exports for the year to June 2012 came to $46.7b. Exports to the Eurozone were $2.9b, UK $1.4b, Japan $3.4b and US $4.1b. That is a mere $11.8b out of $46.7b – under one quarter. Australia is almost a bigger export market than those four combined.

And let me tell you if we started printing money, and Australia was not, watch the outpour to Australia get far far worse.

Some policies put forward are just silly, or ineffective, or wasteful. Some are very very bad and dangerous. This is one of them. The idea of printing money to grow the economy has never worked long-term. It gives you a short-term sugar rush at best. It puts up the price of pretty much all goods and services as inflation grows.

It is actually to our advantage long-term that the US and Eurozone are printing money. Proposing to follow them voluntarily is the worst thing NZ could do.