Much was made in the news yesterday of the Bank of England now being allowed by the Treasury to undertake quantitative easing – “printing money” as it has pejoritively become known.
In fact, although details are still thin on the ground, yesterday’s Treasury announcement – on the establishment of the new Bank of England asset purchase facility – certainly did not mention quantitative easing.
Here’s the statement:
Bank of England asset purchase facility. As a further step to increase the availability of corporate credit, by reducing the illiquidity of the underlying instruments, the Bank of England will set up an asset purchase programme implemented through a specially created fund. The Bank will be authorised by the Treasury to purchase high quality private sector assets, including paper issued under the CGS, corporate bonds, commercial paper, syndicated loans and a limited range of asset backed securities created in viable securitisation structures. The Treasury will authorise initial purchases of up to £50 billion, financed by the issue of Treasury bills. Given the scale of the programme, the Bank will be indemnified by the Treasury. This programme will come into effect from 2 February.
As it says, funding for the new asset purchase programme will be “financed by the issue of Treasury bills”.
Such issuance will sterilise any inflationary money-supply impact the BoE’s asset purchases may have. Assuming then that the statement is correct, and an equal value of Treasury bills are issued relative to assets bought, no money will be “created”.
What the BoE could be said to have now been given the green light for in this statement would be some form of qualitative easing; by which the assets on its balance sheet are changed. In this case, changed from the usual gilts to “paper issued under the CGS, corporate bonds, commercial paper, syndicated loans and a limited range of asset backed securities created in viable securitisation structures.”
Were it oh so simple. In fact, bank officials themselves insist that actually, in qualitative or quantitative terms, yesterday’s statement was only, as the FT puts it today “a clarification of powers the MPC already had.” No green lights at all then.
Certainly in terms of quantitative easing that might be the case. The BoE is already quantitatively easing. Just look at the base money supply.
And as for qualitative easing, it can be said that they’re already doing that too. The range of special liquidity facilities operated by the bank – unsecured – involve swapping gilt securities or cash for other assets from the banks. The BoE’s balance sheet has thus already been qualitatively changed, and already has some credit risk.
So what did yesterday’s announcement herald? Nothing?
Well those bank officials are being slightly coy when they say that qualitative easing is a power they already have. Although qualitative easing through unsecured short-term lending, as mentioned above, is certainly possible, and certainly already occurring, qualitative easing through outright purchases is not.
Buying non-gilt securities outright involves more credit risk than simply borrowing those securities over short periods. Credit risk that is large enough to really require the Treasury’s permission. Willem Buiter explains perfectly in a blog post last week:
Qualitative easing or a combination of qualitative and quantitative easing does increase the credit risk the central bank is exposed to. Conceivably, the central bank could suffer a capital loss on its exposure to private securities that would be so large, that it could only restore its solvency without external assistance through monetary issuance of a magnitude that would threaten its price stability mandate. Indeed, if the exposure of the central bank were to foreign-currency-denominated securities, it might not be able to salvage its solvency through any amount of domestic currency issuance. In both these cases, the central bank (or its inflation mandate) would have to be rescued by the tax payer, through a non-inflationary recapitalisation by the Treasury. This means that qualitative easing, or any combination of qualitative and quantitative easing that increases the credit risk on the central bank’s balance sheet, should require the consent of the Treasury, and cannot be decided by the central bank alone.