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www.telegraph.co.uk/finance/comment/...yone-else-must-pay.html
The jury is still out on the impact of quantitative easing on the economy, but one thing is certain: it has been a boon for the banking sector.
Whether they are acting as intermediaries between different arms of government or trading into anticipated government intervention, the banks are raking it in. They successfully positioned themselves for QE's impact on bonds and equities, and they will try to do the same – though this will be trickier – when QE stops and gilt prices fall. This is one of the main reasons that recent investment banking results have been so strong.
So far, it has been a piece of cake. The Government's purchases of gilts predictably caused yields to fall, so corporate bond yields moved lower in sympathy.
With minimal interest rates on offer, it became harder for investors to find decent returns, so they were encouraged to venture into riskier parts of the market, buying high-yield bonds and stocks (that rings a bell). Banks, of course, were able to position themselves ahead of these market movements.
Well, maybe that's all part of the plan. At least big, credit-worthy businesses have benefited from a dramatic reduction in their costs of borrowing and British companies have been able to raise more than £60 billion worth of bonds and equities since the start of the year, compared with an annual average of £40 billion in recent years. Of course, the banks have also pocketed handsome fees on all that financing.
The problem is that this is of dubious benefit to the British economy. Many of these companies would have been able to raise funds – admittedly less cheaply – without QE. But the small and medium-sized enterprises that employ the bulk of the working population are not able to access these public markets, and their borrowing costs have risen, as banks have tightened loan conditions.
Adam Posen, a newish member of the Bank's Monetary Policy Committee, said in a recent speech that he is "concerned that the financial system in the UK does not have a spare tyre for the provision of capital to non-financial businesses, when the financial system has popped a leak. QE puts this unfortunate fact into clear relief."
Defenders of QE will argue that the policy was intended to bolster banks weakened by the financial crisis, and this is true – but it was supposed to encourage them to lend more, not to boost the trading profits of the despised "casino" banking sector.
The QE experience is a timely reminder that banks are very skilled at gaming the system. By its nature, tackling a financial crisis requires rapid policy decisions, without full analysis of the potential repercussions. That phase is supposed to be over, yet reform proposals are still emerging in an apparent stream of consciousness. The latest example is Gordon Brown's brief espousal at the weekend of a "Tobin" tax on financial transactions, a measure that would be easy for banks to evade and unfair to investors.......
The jury is still out on the impact of quantitative easing on the economy, but one thing is certain: it has been a boon for the banking sector.
Whether they are acting as intermediaries between different arms of government or trading into anticipated government intervention, the banks are raking it in. They successfully positioned themselves for QE's impact on bonds and equities, and they will try to do the same – though this will be trickier – when QE stops and gilt prices fall. This is one of the main reasons that recent investment banking results have been so strong.
So far, it has been a piece of cake. The Government's purchases of gilts predictably caused yields to fall, so corporate bond yields moved lower in sympathy.
With minimal interest rates on offer, it became harder for investors to find decent returns, so they were encouraged to venture into riskier parts of the market, buying high-yield bonds and stocks (that rings a bell). Banks, of course, were able to position themselves ahead of these market movements.
Well, maybe that's all part of the plan. At least big, credit-worthy businesses have benefited from a dramatic reduction in their costs of borrowing and British companies have been able to raise more than £60 billion worth of bonds and equities since the start of the year, compared with an annual average of £40 billion in recent years. Of course, the banks have also pocketed handsome fees on all that financing.
The problem is that this is of dubious benefit to the British economy. Many of these companies would have been able to raise funds – admittedly less cheaply – without QE. But the small and medium-sized enterprises that employ the bulk of the working population are not able to access these public markets, and their borrowing costs have risen, as banks have tightened loan conditions.
Adam Posen, a newish member of the Bank's Monetary Policy Committee, said in a recent speech that he is "concerned that the financial system in the UK does not have a spare tyre for the provision of capital to non-financial businesses, when the financial system has popped a leak. QE puts this unfortunate fact into clear relief."
Defenders of QE will argue that the policy was intended to bolster banks weakened by the financial crisis, and this is true – but it was supposed to encourage them to lend more, not to boost the trading profits of the despised "casino" banking sector.
The QE experience is a timely reminder that banks are very skilled at gaming the system. By its nature, tackling a financial crisis requires rapid policy decisions, without full analysis of the potential repercussions. That phase is supposed to be over, yet reform proposals are still emerging in an apparent stream of consciousness. The latest example is Gordon Brown's brief espousal at the weekend of a "Tobin" tax on financial transactions, a measure that would be easy for banks to evade and unfair to investors.......
