Posted by: Dirk | December 4, 2015

The BBC reporting on QE: complete and utter poppycock

The BBC had an article yesterday which is interesting for two reasons: first, the authors seem to have no grasp of monetary theory, and second, the authors are not asking obvious questions. Let’s have a look:

The overnight deposit rate was cut from -0.2% to -0.3%, to push banks to lend instead of parking money at the ECB.

This is misleading. Since readers usually have no grasp of monetary operations at the central bank level, most readers will get away thinking that banks can lend central bank deposits to households or corporations. That’s false. There are many critiques, so here is just one, written by the chief economist from Standard&Poor’s:

John Maynard Keynes famously wrote that: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” A modern example of that dictum, relevant to the economy, policy, and markets, is the widespread view that banks can “lend out” their reserves (deposits) at the central bank, as if bank reserves represented a pool of money that is just waiting to “flow into” bank lending. Because such a thing cannot occur and therefore has not occurred, the point is usually made in reverse: banks currently are not “lending out” their reserves–rather they are “parking” their reserves at the central bank or leaving them “idle.” But that they might lend them out in the future is a lurking risk and a reason to be cautious about the central bank engaging in aggressive quantitative easing (QE).

So, what QE cannot do is increase lending to the private sector. Have a look at the next bit:

ECB president Mario Draghi told a news conference that its bond-buying stimulus programme, or quantitative easing (QE), was working.

But an extension of QE was needed to tackle prolonged low inflation and get it back towards the ECB’s 2% target, he said. QE would now run to at least March 2017, from

Apart from the fact that the second sentence does not end, the reader is left to wonder what it means when Draghi says that QE is working. Do we have higher inflation? Do we have more economic growth? Do we have lower interest rates? The BBC, if it would take journalism seriously, should have asked Draghi what the meaning of this “mission accomplished” statement actually means. Given that “QE works”, why do we need more of it? Wasn’t it supposed to return the economy to positive inflation rates and stimulate growth? Most academic economists that I know say that QE has been a failure. Richard Koo has written a book on the QE trap. He says that QE is actually harmful because it takes away interest-bearing assets, which lowers profits for banks. Academic economists associated to Modern Monetary Theory have been saying the same thing. The BBC pretends that none of that is actually relevant. On we go:

The cut in the interest rate on overnight bank deposits means that banks in effect pay more to the ECB for holding their reserves.

The policy is designed to make it more profitable for banks to offer loans to consumers and businesses, ensuring a free flow of money.

That one defies logic again. If you understand a bit about reserve accounting, then you would understand that banks making loans probably transfer more reserves to other banks in the future. However, these are transfers: what one bank loses in reserves, another gains. It is a zero-sum game. Some banks that are indebted vis-a-vis the ECB might use the reserves to pay down debt, so the quantity of reserves should fall if QE is successful. None of this is said in the article.

Ahead of the announcement, the euro had been weakening. However, when the measures fell short of expectations the euro surged against the dollar, rising more than two cents to above $1.08.

Here is the real news: QE is a strategy to push the euro down in order to increase external demand. Obviously, more European exports will be paid by the rest of the world increasing their debt. This is the global imbalances thing on the world stage, and a re-run of the macroeconomic imbalances inside the euro zone. No mentioning of this issue is made at all.

Towards the end, the BBC flip-flops on inflation:

But “core inflation”, which strips out volatile food and energy prices, is also low, hovering persistently around 1%.

The latest figure, for November, was down on the previous month.


This leaves the reader puzzled. Did not Draghi say that QE works? But why isn’t inflation a) at the target level (a little below 2%) and b) why isn’t the inflation rate moving up, with all that QE going on? Don’t get me wrong: Draghi is between a rock (reality) and a hard place (Merkel/Schäuble). He doesn’t have a lot of room of manoeuvre. However, the press should then point that out. Without fiscal policy, monetary policy obviously is not enough to get the job done!

The article ends with an economics correspondent from the BBC chipping in:

And the markets expected a bigger cut in the interest rate on banks’ deposits at the ECB. It’s already below zero which means the banks are being charged to park excess funds at the central bank.

A bigger cut would have given them an even bigger incentive to lend more rather than sit on idle cash.

Well, if you think that banks can lend out “excess funds at the central bank” to households and corporations – it’s a free world! Nevertheless, I wonder whether the British public deserves this kind of reporting coming from a government-run institution. Other public institutions in Britain are quite clear in their view of QE:

As a by-product of QE, new central bank reserves are created. But these are not an important part of the transmission mechanism. This article explains how, just as in normal times, these reserves cannot be multiplied into more loans and deposits and how these reserves do not represent ‘free money’ for banks.

That’s the Bank of England. But what does a central bank know about money?


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