Confusion about QE

Fraser Nelson is hopelessly confused here. He says:

The massive Quantitative Easing programme is making it harder for companies to raise money, because the government is flooding the market with its own IOU notes. The Bank of England today confirmed that less than 1% of the £44.5bn it has printed has gone to buy company loans – it had indicated that as much as a third of the £150bn pool would go to companies. Instead, it is a mechanism to help the government issue the £240bn of gilts it’s issuing this year.

He is correct that QE has overwhelmingly been used to buy gilts. But you can’t complain both about this and about the government crowding out the corporate sector. If the Bank of England were to buy all the gilts issued this year, the government wouldn’t have to tap the private sector for cash at all, leaving it free to fund companies. Bank of England gilt purchases are the solution to the crowding out problem. 

If the markets think QE is actually a way of one department of the government printing money for the other departments to spend (a la Weimar Germany), then confidence in the currency collapses.

And if my aunt had bollocks she’d be my uncle. The fact is that confidence in the currency has held up since the Bank announced the start of QE in early March. Sterling’s trade-weighted index barely budged. Sure, this could change. But, so far, it’s irrelevant to the relationship between QE and corporate financing.
Fraser then points to the collapse  in lending to non-financial companies, and says:

One explanation is that British companies are simply paying down debt. Another is that the government’s debt issuance is so extreme that it is crowding out other forms [of borrowing].

There is, though, a third explanation - that the credit crunch has made banks unable or unwilling to lend to companies. If we look at the monthly path of bank lending to non-financial firms, we see that this fell in the autumn, after the collapse of Lehmans, but has recovered a little since. If it was gilt issuance that was denying firms’ financing, you’d expect the opposite pattern.
Now, I say all this not to defend QE; I have big doubts about its effectiveness. However, to blame it for companies’ lack of finance is just silly. 

Comments

[kinglear]

Bang on. The QE set up has no effect on the "real" market for borrowing - whatever that is nowadays.
Whether it'll work or not is another matter. The lady bank teller I was speaking to yesterday said people were beginning to ease up a bit - they'd got through 6 months, and felt if it didn't get any worse they could cope. IF it didn't get any worse...

[Alice Cook]

Stumbling,

This is nonsense:

"you can’t complain both about this and about the government crowding out the corporate sector. If the Bank of England were to buy all the gilts issued this year, the government wouldn’t have to tap the private sector for cash at all, leaving it free to fund companies."

If the BoE bought all the government debt stock, they would inject a huge amount of liquidity. That would feed into higher inflation, fueling uncertainty about the real rate of interest, which would in turn generate a higher risk premium for firms.

This would lead to crowding out, and lower economic growth.

Alice Cook

http://ukhousebubble.blogspot.com

[chris]

@ Alice - I agree, if inflation rises, it's quite possible that firms would find it harder to borrow, ceteris paribus. But this is not the claim Fraser is making; he's arguing that crowding out is happening now.
Nor, I think, could he make the claim. Yes, inflation expectations have risen since QE began - as the BoE wants - but they are still lower than they were last autumn. Breakeven inflation rates of under 3% are not a cause of companies' difficulties.

[kinglear]

Chris - Guardian's scoop about BofE worries about the other shoe dropping and the increase of another £50billion of QE seem to suggest that whatever else is happening, businesses are NOT getting the money they need and there is at least another horrible set or two of bank figures. There are lots of stories of overseas banks NOT rolling over loans, but just taking their money home.THAT could be really really nasty, a la Iceland.

[john problem]

Well, it's all very well, this high-faluting stuff about quantitative easing and such (curious how banking phrases parallel the digestive system.) But if you're staggering along on an old age pension of £90 per week (lowest in Europe), wondering if you can afford another smoke,it don't mean a thing. Nobody has yet got any forecast about the financial future that makes sense. Mrs. Jones down my street says that it'll all come out alright in the end as it always does, dear. "Fraser Nelson," she says, "Fraser Nelson! I used to do his cleaning and he didn't have a single book on economics - all Dandy and Beano." She's probably just as well informed on what's a-coming down as our esteemed Chancellor and his greasy boss - probably more so.

[Kit Collis]

Thank you for clearing that up. That is the kind of thing that, if I were to read it, would conflict with my rudimentary understanding and leave me feeling confused as to whether I am right. The piece that you refer to is terrible.

[kinglear]

Fraser probably learned more about economics and human behaviour from the Dandy and the Beano than any of us have from economics textbooks.
Even if he can't remember it....