Quantitative easing is a process where a Central Bank creates money electronically. It uses this new money to purchase assets and bonds (mostly government bonds) from commercial banks and financial institutions. For more see: Quantitative easing explained
Quantitative Easing has helped many holders of government bonds who have benefited from selling bonds to the Central bank. In particular commercial banks have seen a rise in their bank reserves. To a large extent commercial banks have not lent out their new bank reserves. Therefore the effect of quantitative easing on the wider economy has been limited. The main beneficiaries of Quantitative easing have been banks and financial bodies who seen a rise in their liquidity and rise in the price of bonds.
Some argue that quantitative easing would have been better if the Central bank had used the created money to prop up the housing market, at least in the US where house prices have fallen considerably. This would have stabilised prices and helped reduce levels of negative equity. This may have had a broader impact on the economy as more householders would have benefited from stabilised house prices. Banks may also have been more willing to lend if the housing market was better supported.
By purchasing government bonds, the main beneficiaries of quantitative easing have been commercial banks.
Wider impact of Quantitative Easing
It seems the main benefit of quantitative easing is geared towards the financial sector (who are in many eyes least deserving of extra money). However, there is also a wider impact of quantitative easing on the rest of the economy.
The increased money supply and lower interest rates have played some role in stimulating higher economic growth and preventing deflation (as measured by core inflation). To some extent, quantitative easing has played a role in diminishing unemployment and providing a small stimulus to a fragile economy. This has been impact in the face of fiscal austerity and zero bound interest rates. Quantitative easing is one of the few policies left to help stimulate economic growth. Therefore, there has been a wider benefit to quantitative easing than just bankers.
One problem with quantitative easing is discovering how much it has actually effected economic growth. It is hard to directly measure the impact of quantitative easing on the rate of growth and unemployment.
Quantitative easing does benefit mainly those at the higher end of the income spectrum, but this in itself is not reason to dismiss it. It remains a relatively untried and imperfect monetary policy, but at this stage in the economic cycle better than nothing.
Bank of England Profit from Quantitative Easing
The Bank of England is currently making a profit on Quantitative easing. The return from the bonds it holds is greater than the interest it pays on reserves. For example, in 2010, the Bank of England made £8 billion profit from the Q.E programme (Telegraph) It is estimated by 2013, this ‘profit’ could be £20.7bn (link)
Note, the ‘profit’ means the government is paying the Bank of England interest, like the government pay other bond holders. It is transferring money from one part of government to another. However, when interest rates rise, this profit will turn into a loss.
- How quantitative easing works
- Fed claim quantitative easing avoided inflation and kept unemployment lower at FT
- QE data set at Bank of England