Real QE is yet to come in Europe
The ECB’s monetary easing policy is nice for the banks, but it won’t do anything to help the wider economy, says Merryn Somerset Webb.
I wrote here last week that the key question about the ECB's monetary easing was not so much what assets the ECB intended to buy, but who it intended to buy those assets from.
This is key for a very simple reason. If a central bank buys assets (whatever they are sovereign bonds, mortgages, etc) and the banking system is broken, it will make no difference whatsoever to the wider economy. For that to happen, the money needs to be lent out and broke banks don't make loans. The policy transmission mechanism doesn't work.
If, however, the central bank goes into the market and buys the assets freely there, it direct injects new money into those markets money that then gets passed around.
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This is why QE had no effect in Japan, beyond preventing the obvious bankruptcy of the banking system in the 1990s but appears to be having an effect now (in the past the Bank of Japan bought from the banks, now it is buying in the market).
So which is it this time around in Europe?
When I read the ECB's statement, it looked very much as though the plan was to buy from the banks, largely because the market in asset backed securities (ABS) isn't big enough for anything else to happen.
However, MoneyWeek regular James Ferguson, of Macro Strategy Partners, is more of an expert on the inside workings of central banks than I will ever be, so I asked him to take a look too. He has. And he agrees with me.
It appears that new ABS are "to be created for the purpose directly from banks' loan books". This is nice for the banks it helps them deleverage. But it doesn't inject new money, and it doesn't do much for credit easing. Real QE is yet to come in Europe.
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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