“Quantitative easing is theft. It is theft from the future, from the poor to prop up the rich. It is morally wrong”.
That was the take of Liberal MP Tim Wilson, chairman of the House of Representative Economics Committee, in parliament on Wednesday, on a policy which, a day later, the Reserve Bank publicly endorsed.
“Quantitative easing is a policy option in Australia, should it be required,” said deputy governor Guy Debelle, in a speech in Sydney on Thursday night.
Cutting official interest rates is one thing, but QE — creating money out of thin air to buy assets from banks in a hubristic attempt to manipulate interest rates — would be a gamble in Australia, politically as much as economically. Hot on the heels of the royal commission into financial services, pumping government money into the big four banks — even “for the greater good” — wouldn’t be a good look.
In fairness, though, QE has been all the rage for a decade overseas, ever since the global financial crisis rendered conventional monetary policy impotent.
The US Federal Reserve has stopped buying US government bonds, but still holds a whopping $US2.2 trillion ($3 trillion) of them. As for March last year, almost a decade after the GFC, the Japanese, European and British central banks were still merrily buying up their own governments’ bonds as part of quantitative easing efforts — to the tune of $US125 billion a month. After years of quantitative easing, more than a quarter of the $US32 trillion in outstanding government bonds in the US, euro area, Britain and Japan are now owned by government authorities.
The Reserve Bank, like all central banks with their own currency, has the power to create unlimited quantities of money. It could easily start snapping up the $537bn of federal government debts outstanding, and state gov- ernment debt too, if it wanted.
QE is meant to work by removing long-term assets, such as government bonds, from the market, which makes them scarcer and therefore increases their price (and conversely lowers their yield, or the interest rates they pay). Lower long-term interest rates might make businesses invest more, and if asset prices rise, people might spend more, boosting economic activity. That’s the theory anyway.
It’s been controversial ever since the Bank of Japan first rolled it out in the early 1990s. Most studies tend to argue QE has indeed been effective in reducing long- term interest rates, by around half a percentage point. Central banks typically extol its virtues, but the impact on the broader economy is not clear, and the unintended consequences are serious.
For a start, economic growth since the GFC hasn’t been great, especially on the wages front. The only “investment” taking place as a result of lower long-term rates has been households maxing out on mortgages. Business investment has been chronically weak.
QE hasn’t caused the huge inflation detractors feared because the new money hasn’t seeped into the real economy, where QE has been tried. Banks typically deposit the newly created money they receive for their bonds back with the central bank, receiving the cash rate in return rather than a coupon payment from Treasury. The balance sheet of the public sector as a whole, the Treasury plus its central bank, expands and changes. Its liabilities become bank reserves rather than bonds.
“We also need to be honest about what happens when you have quantitative easing,” said Wilson this week.
Whatever its academic merits, QE draws private banks even clos- er to the state, entrenching the power of the major banks, crushing competition, not to mention distorting the price of financial securities even further. If you think prices set in a free market are a virtue, this is a worrying development. As well, central banks in Japan, the UK and Europe have barely sold any of the bonds they have bought, fearful of the ramifications of reversing course.
The senior official who oversaw the Federal Reserve’s quantitative easing program told me in 2016 Australia would be “very illadvised” to go down the same path, arguing that QE subsidises banks and corrupts financial markets with little benefit for the general population. “It’s not a tool that benefits the general population much, but rather overwhelmingly the financial sector and the wealthy; the cost-benefit analysis is totally skewed,” said Andrew Huszar, then an academic at Rutgers University.
Even if QE boost GDP growth by a sliver of a percentage point, if it enriches a parasitic elite further it might not work politically.
Around the same time, former deputy governor of the Bank of Japan Kazumasa Iwata told me that Japan’s QE program inherently helped the financial sector. “Japanese taxpayers are, ultimately, subsidising bonuses and bank profits. But this is not easy to see,” he said. Indeed, the Bank for International Settlements in 2016 estimated trading banks enjoyed a £1.85bn subsidy from the Bank of England’s first two rounds of QE because the banks could reliably buy newly issued bonds from the Treasury and sell them back to the BoE at a higher price.
Senior Reserve Bank official Chris Kent in 2016 said the RBA might consider QE if it had lowered the cash rate to 1 per cent. Thankfully, given the cash rate is currently 1.5 per cent, we appear to be still a couple of rate cuts away from any serious QE deliberations in Martin Place.
The Reserve Bank enjoys a better reputation among the public than central banks in Europe, the US or the UK do. Whatever benefits QE might bring, best to avoid if it risks a royal commission that reaches conclusions more along the lines of what Ben Chifley wanted when the relationship between credit creation and government were last formally considered in Australia.