Friday, 26 April 2013
The impotence of QE.
Congratulations to Azizonomics for publishing this chart showing the non-effect of QE over the last four years on endogenous money (commercial bank created money).
Of course the collapse of endo money might have been worse had it not been for QE (a favourite argument used by the Bank of England). But I prefer the explanation given by Steve Keen and advocates of Modern Monetary Theory, namely that the endo tail wags the exo dog. In other words, commercial banks lend money into existence when they see viable lending opportunities. As to what the central bank is doing with its exo money, well commercial banks just couldn’t care less.
Or put another way, as Simon Jenkins keeps pointing out, the best solution for a recession is to hand money to the consumer or raise public spending (depending on your political preferences). Having done that, commercial banks will then expand their lending (or not) as they see fit.
And if anyone wants to argue that businesses are currently having difficulty getting bank loans, my answer is that that is hardly surprising: banks were lending like there’s no tomorrow prior to the crunch and have now realised their mistake. I.e far from bank lending now being LESS THAN optimum, it is arguably NEARER the optimum.
Banking in the UK has expanded by a whapping TEN FOLD relative to GDP over the last 30 years. Was economic growth severely constrained 30 years ago because an inadequately sized banking industry? I think not. In fact economic growth then was much better than over the last 5 years. How on earth did we manage 30 years ago despite an grossly inadequate banking industry. I’m baffled.