It's Yvette Cooper who is wrong not Jeremy Corbyn; re QE

It’s Yvette Cooper who is wrong about Quantitative Easing not Jeremy Corbin (1)

Robin Matthews

It’s Yvette Cooper who misunderstands Quantitative Easing (QE) not Jeremy Corbin. Maybe she is just mistaken, the same kind of mistake that led Labour to accept Conservatives’ fallacy that they inherited a deficit created by labour profligacy on welfare, rather than inheriting a bailout. 

Quantitative Easing (QE)

‘Printing money’ is a misleading phrase. QE is a process of government (via the Central Bank) buying back its own debt (government bonds). It’s a balance sheet transaction that substitutes private sector holding of government debt by equally increasing government holding of its own debt.

Liquidity tied up in government debt is equivalently part of private sector assets, appearing on the asset side of private sector balance sheets and the liability side of the government balance sheet.  When government buys back its debt, government holding of its own liabilities (debt) increases and equivalently private sector ability to lend cash and extend credit is increased.

QE changes the composition of the balance sheets of both, but changes neither the total liabilities nor the total assets of either. Government holds more of its own liabilities. Its total liabilities are unchanged but now it holds more of its own debt; it owes more to itself, more precisely since the government represents us all, we owe more to ourselves.

The composition of private sector, mostly bank, assets on their balance sheets changes. They have more cash and hence greater ability to lend or to buy assets from each other.

Usually QE involves buying back short term government debt. What Jeremy Corbin presumably has in mind is to use QE to buy back the assets of privatised energy and rail companies, returning them to public ownership; a long term transaction.

Back to this later.

QE in the recession

Short term QE is normal. Usually it’s neutral. Purchases of old government bonds are accompanied by equivalent government sales of new bonds; a process of ‘rolling over debt’, retiring old debt, creating equivalent new debt.

The effect of net QE, net buying back of private sector assets (purchases greater than sales), is to raise their price or at least to prevent asset prices falling disastrously. In the financial crisis beginning 2007/8 there was net QE and this is exactly what happened.

QE bailed out the banks. The bank bailout worked by enabling banks to honour their liabilities to each other. In other words, QE rescued inter-bank lending from collapse.

The problem though is that there the process stopped. The intention of QE was both to bail out the banks and prevent recession; to increase bank lending to business (the non-bank sector), especially small business.

This didn’t happen. Why? Two reasons.

First, the recession meant that consumer spending fell; recession plus bank cutbacks on lending. Business was reluctant to borrow for new investment. Added to this, banks are rather vindictive, allowing good businesses (good non-toxic assets!) to go bust, just when they need to borrow.

Second, it’s very profitable, certainly more profitable for banks, to use the extended power to lend, to lend more to each other, than to use QE to lend to small business. Bank lending to each other resuscitated the asset bubble.

Back to Mr Corbyn.

Back to Mr Corbyn. His policy of using QE is not foolish, despite Ms Cooper.

Buying back privatised assets, represents an increase in government long term indebtedness. But think of a good business reason for indebtedness; investment, based on the expectation that the value of the investment (net present value, NPV) is positive. 

In Mr Corbyn’s case his reason is “[I]nnovation, decent jobs and decent public services”. He believes this means that there is positive value in this kind of project.

And I think, so do many commuters, travellers and household and business customers of energy companies.     


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