Why "people's QE" is utter nonsense

An idea being proposed by Jeremy Corbyn—and which was reiterated on Radio 4's Today programme this morning by Ken Livingstone—is that Quantitative Easing (QE) should be used to fund public services. The banks caused the crisis, Ken explained, and have been handed £375bn by the Bank of England's QE programme. Why can't the Bank, he asked, instead of showering cash at the hoodlums of the City, give it to the public instead, spending the money on public works, including high speed broadband?

This notion of the “People's QE,” has been a significant piece of Jeremy Corbyn's economic argument and, like the man himself, it has a certain appeal. The notion that the banks broke the system and then received a huge payout is a clanging moral discord. Suggesting that some of that money would be better directed towards the austerity-benighted populace has its attractions.

The problem is that it's utter nonsense. What it shows, very clearly, is that neither Corbyn, nor Ken, understand what Quantitative Easing really is, or how it works. The process is not “printing money,” as the often-deployed media heuristic would have it. Mark Carney does not have a press in the vaults of his HQ.

QE is a rather odd mechanism, that is used when Central banks have cut interest rates so far that they can't go any lower. The Japanese used it when their economy hit the skids back in the 1990s and Ben Bernanke—nicknamed “Helicopter Ben” for his willingness to shower money from on high—used QE when he was Chairman of the US Federal Reserve.

What happens in these circumstances is that the Central Bank starts buying up financial assets, predominantly government securities: that is, government bonds. In normal circumstances, the Bank of England will make interventions in financial markets. But when it comes to QE, it buys huge slabs of assets—in the case of the Bank of England, £375bn-worth—and the effect is to create new deposits in the institutions that are selling those assets: banks.

And that's it. QE is a mechanism for the Central Bank to inject money into the banks by buying securities from them. They do not buy financial assets from councils, or individuals, or housing associations, because they tend not to have any to sell.

This is not to suggest that Central Banks could never capitalise government projects. It could in theory be done and has been discussed under the catchy title of “Overt Monetary Financing.” But that's not QE, which is, it should be remembered, a mechanism designed as a solution to the Central Bank problem of how to stimulate growth when interest rates are already at zero. Ken—and Jeremy Corbyn—seem oblivious to this. What they are proposing is, as such, at variance with the most basic facts.