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So what the hell is ‘quantitative easing’?

For a long time John Lanchester’s coverage of the financial crisis has been the best thing about the London Review of Books. Yet even by his own high standards, his most recent essay is spectacularly good:

 It’s done so through quantitative easing, which involves buying back its own bonds using money that doesn’t actually exist. It’s like borrowing money from somebody and then paying them back with a piece of paper on which you’ve written the word ‘Money’ – and then, magically, it turns out that the piece of paper with ‘Money’ on it is real money. (Note: don’t try this.) Another way of describing quantitative easing would be that it is as if, when you look up your bank balance online, you had the additional ability to add to it just by typing numbers on your keyboard. Ordinary punters can’t do this, obviously, but governments can; then they use this newly created magic money to buy back their own debt. That’s what quantitative easing is.

The idea is that since interest rates are so low, it’s in no one’s interest to sit on this newly created money. If you are one of the bond-holders who has sold your government debt back to the government, you will now go and spend your new cash on something that yields a higher rate of return. You’ll buy shares with it, or invest it in your business, or something – anything – else. In the UK, the government has spent magic money on QE to the tune of £375 billion, 23.8 per cent of our GDP. An amount equal to a quarter of our entire annual economic activity has therefore been willed into being in an attempt to stimulate the economy. If they’d just given the money directly to the public, perhaps in the form of time-limited, UK-only spending vouchers, it would have amounted to just under £6,000 for everyone, man, woman or child, in the country. Can anyone doubt that the stimulus effect of that would have been much bigger?

[…]

The new head of the bank is ‘St’ Anthony Jenkins, who has been sanctified by City wags in honour of his many homilies on the subject of the new ethical Barclays. He said on 28 June that the new rules ‘could restrict our ability to extend balance sheet availability to customers, including – potentially – lending to the UK and other economies, which’ (at this point it is helpful, if you want the full impact of Jenkins’s remarks, to imagine him leaning back in a black leather chair, stroking a white cat) ‘is something of course we want to avoid’. In other words, if you try to make us safe, we’ll stop lending. But this is a non sequitur. Why should the need for more equity restrict lending to UK customers? Look where the equity sits on the balance sheet. Why does needing more of it necessitate lending less to the real economy, on the other side of the balance sheet? If you want to shrink your balance sheet, as banks do, why target the minority of your assets which is represented by customer loans? As I pointed out earlier, only 28.6 per cent of Barclays’ assets are real, economy-helping loans. Gee, by being so quick to focus on the way the new rules could hurt the rest of us, it’s almost as if St Anthony were making a threat. Hang on, what’s he got in his hand, right next to the cute little pussycat? He can’t be holding a gun to its head, can he?

http://www.lrb.co.uk/v35/n14/john-lanchester/lets-consider-kate

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