It would have been cheaper to let the banks go bust than let the global economy float on a glut of QE-driven debt, says Stephen Hill
In the great Battle of the QE Bulge, the drifting ECB has finally overcome the fierce rearguard action of the Bundesbank. The only problem is it comes six years after QE was really needed in the EU as the only thing we can all agree on about QE is that it swells the monetary base of the given currency area, which Germany dreads. It's been there before.
Bernanke's first round of QE, after the US TARP programme had headed off the immediate threat of financial meltdown, was to provide liquidity to a starving financial sector that couldn't work without it.
More rounds followed, but at some point Bernanke got it wrong: he thought QE could revive the wider economy too, but as we all now know, it did no such thing. At some stage his $3.6 trillion expansion of the Fed's balance sheet simply created asset bubbles in stock and property markets: the rich got fatter and the food queues longer.
In June 2012 the ECB issued ’1.2 trillion of QE to oil the EU's financial system – so far, so good – but there was no recovery of lending, as banks still had to deleverage their over-blown balance sheets. An ongoing slump ensued in the land of the one-size-suits-all/single-no-devaluation-currency, which accelerated throughout the whole EU in 2014, especially in its core of France, Germany and Italy.
So, now there is another ’1.08 trillion of QE (or ’2 for every EU citizen), dripped into the economy at ’60 billion a month over eighteen months. Is it to fuel a recovery? Of course not: it's just another dose to try to save the financial system and the bad debts in the system.
In the current deflation in the EU, bank balance sheets have worsened, as asset prices – of property in particular – have kept falling, especially in Club Med.
Merkel correctly observed that to get growth going again, it is now up to the politicians, but no more QE – lower taxes instead. The trouble is no European country – except smug tiny tax-scheming Luxembourg – is within the Maastricht criteria with their excessive levels of debt, and so can't reduce taxes. In fact most of them need to raise taxes.
The reality is that in the debt-driven boom leading up to 2008, the politicians followed the bankers down and out of sight into the big black hole of debt. Their only way out is to begin reducing bloated social security budgets – farewell the Welfare State, it was nice knowing you.
The reality is that it would have been cheaper to save depositors' money and let the bust banks go bust, and to write the bad debts off and out of the system. And that was before the future costs of QE click in down the road.
The world is now swilling along on a giant cushion of overbloated QE-driven debt, first in the US, then the UK, now the EU and China, while emerging countries have built large foreign currency reserves.
Central banks cannot themselves go bust, but they can bust their currencies, and have done so many times over before, but never in the US or UK: the Anglo-Saxons write off bad debts as incurred.