Thursday, August 28, 2014

Every Assistance Short of Help

Is the ECB about to go QE? We await with breathless anticipation.

Today's appointment of BlackRock to help the ECB design a programme to buy asset-backed securities (ABS to give it its full acronym) has been interpreted by many as a sign the eurozone will soon witness full blown quantitative easing. And needless to say, it's all being sold as really really good for Europe's small businesses still desperate for bank finance to help expand and create jobs. Why, I'm sure it'll even reduce our carbon footprint as well, come to think of it.

Of course, it's all BS (another acronym). Apparently, in order to get the banks to lend enough money to businesses (with a modest margin added for profit), the ECB has to (sharp intake of breath) get the banks to bundle existing loans into securities that are sold to fixed-income investors (in this case, the ECB) so that the banks will then have better balance sheets which in turn will enable them to raise low interest rate funds in order to be able to lend money to SMEs. Or at least I think that's the plan. The fact that the whole 'mortgage-backed securities'/QE thing has been tried and failed in Japan, the United States and the UK (from a lending to SMEs/sustainable growth point of view) should not in any way be considered a reason not to try it in Europe too.

Needless to say there are many people in favour of QE. Like the executives in charge of large corporations who have used QE to indulge a binge of share buybacks to boost the value of their own share options, which has in turn exacerbated the wealth inequalities many people seem vexed about. Apparently this is a much safer bet for the banks than taking their QE gains and, you know, actually lending money to businesses who need to it to grow.

A case, once again, of 'every assistance short of help' for Europe's small businesses.

Still, it's not too late to consider the alternative. Like giving the money directly to the people. Even Foreign Affairs thinks this might be worth trying. A sort of 'QE for the people'. As Mark Blyth and Eric Lonergan explain it:
Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.
But the problem in Ireland is that most of the money will simply go to paying off debt, with only a limited impact on spending and growth (which would help most SMEs dependent on the domestic market). Which means that QE for the people requires another, even more radical policy if the nation's debts are to be reduced. And there's only one way to do that: DF.

DF is an acronym that stands for the thing that will have to happen anyway in Ireland, the eurozone, the UK and the United States. And the sooner the better. DF stands for:

Debt Forgiveness

Though probably not before Europe's executives have enjoyed their own share buyback binge. Europe's small businesses will just have to wait their turn.

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