Quantitative easing – expanding base money in circulation (mainly bank reserves with the central bank by purchasing government securities) – isn’t working in the US, the UK or Japan. Credit easing – outright purchases of private securities by the central bank, which can either be monetised or sterilised – is achieving little in the US or the UK, although it has not been pushed too hard yet. Enhanced credit support in the Euro Area – providing collateralised loans on demand at maturities up to a year at the official policy rate – is not working either. These policies are not improving the ability and willingness of banks to lend to the non-financial sectors. They have had little positive impact on the corporate bond market. It is not surprising why this should be so, once we reflect on the actions and the conditions under which they are taking place.
In a nutshell: quantitative easing (QE), credit easing (CE), and enhanced credit support (ECS) are useful when the problem facing the economy is funding illiquidity or market illiquidity. It is useless when the binding constraint is the threat of insolvency. Today, liquidity is ample, even excessive. Capital is scarce. Capital is scarce first and foremost in the banking sector. A panoply of central bank and government financial interventions and support measures have ensured, at least for the time being, the survival of most of the remaining crossborder banks. It has not done enough to get them lending again on any scale to the household and non-financial enterprise sector.