Econintersect: It is widely argued that QE (quantitative easing) is a bailout for banks and not for the broader economy. The QE process involves the purchase of Treasury Securities by the Federal Reserve. This involves the replacement of Treasuries on the banks’ books with cash reserves at the Federal Reserve. Economist Warren Mosler argues that this is actually bad for banks, contrary to popular belief.
Mosler argues as follows on his website (Mosler Economics):
1. QE forces the member banks to have excess reserves as assets on their balance sheet. These balances earn only .25% lowing the banking system’s net interest margin, return on assets, and return on equity.
2. To maintain high enough average net interest margins (that include the holding of excess reserves) to attract capital, banks tend to charge a bit more for loans to business and consumers, which causes more borrowers to go direct to credit markets and private lenders in general. In other words, QE tends to support disintermediation, as those who can avoid the banks do so.
3. QE lowers interest income paid by govt to the economy, as per the $100 billion of Fed profits turned over to treasury last year. Lower interest income makes the economy that much less credit worthy, thereby lowering its ability to borrow and service bank loans.
Mosler believes that QE is actually a tax on the economy as opposed to the Fed argument that it is stimulative. Because the money created by the Fed to buy Treasury Securities is held as excess reserves by the banks rather than deposits, Mosler says:
“…QE is functionally the same as the tsy [Treasury] not having issued the securities in the first place.”
In Mosler’s view the least damage to the economy would result from the government issuing no securities with maturity longer than 3 months.
Mosler argues that tax reduction would be a much better economic stimulus than the current monetary policy.
Source:
- QE is bad for banks (Warren Mosler, Mosler Economics, 07 October 2013)